Cognizant Technology Solutions

Basics of PBM Industry

An Introduction to PBM – L0

PBM CoE 2009

Table of Contents

1. Introduction ____________________________________________________________ 4

2. History of PBM__________________________________________________________ 8

2.1 Origin of PBMs ____________________________________________________________ 8

2.2 Evolution of PBM Industry __________________________________________________ 9

2.3 Evolution of PBM Services ________________________________________________ 11

3. PBM Services __________________________________________________________ 15

3.1 PBM Administrative Services ______________________________________________ 15

3.2 PBM Clinical Services _____________________________________________________ 28

4. Overview of PBM Financials and Pricing _________________________________ 46

4.1 Contract based pricing ____________________________________________________ 47

4.2 Pricing ___________________________________________________________________ 48

5. PBM Relationships _____________________________________________________ 52

5.1 PBM Relationships with Retail and Mail Pharmacies _________________________ 52

5.2 PBM Relationships with Pharmaceutical Manufacturers _____________________ 54

5.3 PBM Relationships with Plan Sponsors ____________________________________ 55

5.4 PBM Ownership Models ___________________________________________________ 57

6. Pharmacy Benefit Management- Regulatory Compliance __________________ 59

7. PBMs and Medicare Part-D Program _____________________________________ 63

7.1 Medicare Part –D: An Overview ____________________________________________ 63

7.2 Selection of PDP Providers ________________________________________________ 63

7.3 Role of PBMs _____________________________________________________________ 64

8. Medicaid Pharmacy Benefits Management _______________________________ 68

9. The Role of IT in PBM Industry __________________________________________ 69

9.1 The Need for IT ___________________________________________________________ 69

9.2 IT Dependency ___________________________________________________________ 69

9.3 Benefits of IT _____________________________________________________________ 70

9.4 IT Services in PBM Industry _______________________________________________ 70

9.5 eHealth __________________________________________________________________ 73

9.6 EDI in PBM Industry ______________________________________________________ 75

9.7 Data Warehousing ________________________________________________________ 76

9.8 Health Informatics ________________________________________________________ 78

9.9 Advanced Pharmacy Systems _____________________________________________ 79

10. NCPDP Standards in Prescription Process _____________________________ 80

11. URAC Accreditation for PBMs _________________________________________ 84

12. TRICARE Pharmacy (Tpharm) _________________________________________ 85

1. Introduction

PBMs - At a glance:

Pharmacy benefit managers (PBMs) have emerged as the national standard for the administration of

prescription drug insurance in the United States. Today, in an environment of rising drug costs and

utilization, PBMs provide pharmacy benefits to nearly 210 million Americans, While they emerged in the

mid-1980s as entities that processed prescription drug claims, they have expanded to provide a wide

range of services, typically including developing and managing drug formularies and pharmacy networks

and providing drugs through mail-order and specialty pharmacies. The PBM‘s ability to reduce costs,

provide national pharmacy access, and administer benefits that are customized to meet the needs of a

wide range of clients in a highly automated environment all attribute to the success of the industry.

Background:

Pharmacy benefit managers provide services to health plan sponsors to help manage prescription drug

benefits. PBMs initially emerged in the mid-1980s as prescription drug claims processors. In the early

1990s, they began to expand services and currently offer a wide range of services designed to manage

pharmacy costs. In addition to processing claims submitted by pharmacies, these services include drug

formulary development, pharmacy network development and management, mail-order and specialty

pharmacy services, rebate negotiation, therapeutic substitution, disease management, utilization review,

and support services for physicians and beneficiaries. See Exhibit 1 for an explanation of each of these

services.

Pharmacy Benefit Managers Provide a Variety of Services to Health Plan Sponsors

Type of Service Description

Pharmacy Claims

Processing

Verifies beneficiary eligibility and plan benefits and pays pharmacies for

filling prescriptions.

Drug Formulary

Development

Identifies which preferred and non-preferred drugs to include in health plan

benefits, develops rules for generic substitutions, and establishes co-

payments and/or deductibles.

Pharmacy Network

Development and

Management

Establishes a network of pharmacies from which beneficiaries can

purchase their prescriptions.

Mail-Order and

Specialty Pharmacy

Services

Provides beneficiaries with the option to obtain prescriptions by mail and at

specialty pharmacies for prescriptions to treat complex and chronic

diseases that are not dispensed at retail pharmacies.

Rebate Negotiations Lowers the cost of drugs by negotiating discounts with manufacturers for

formulary placement and volume.

Therapeutic

Substitution

Ensures that, when clinically appropriate, physicians prescribe drugs that

are on health plan sponsors‘ drug formularies.

Disease Management Provides health education to beneficiaries to help them better manage

specific medical conditions, such as diabetes or asthma.

Utilization Review Reviews beneficiary drug usage and recommends ways to lower costs,

including switching a prescribed brand-name drug to a generic or less

expensive brand-name drug.

Support Services for

Physicians and

Beneficiaries

Provides education to physicians and beneficiaries on appropriate

prescribing and prescription use, general health and wellness, and patient

compliance.

Source: OPPAGA interviews and analysis of Pharmacy Benefit Managers (PBMs): Tools for Managing

Drug Benefit Costs, Quality, and Safety; Health Policy Alternatives, Inc.; August 2003.

Health plan sponsors contract with PBMs to provide various services. For example, a large health

maintenance organization that prefers to oversee formulary development and disease management in-

house may only contract for a few services, such as claims processing and pharmacy network

management. Another sponsor might prefer to contract for a full array of services, including most or all of

the services described in Exhibit 1.

Payments for these services are established in contracts between health plan sponsors and PBMs. For

example, contracts will specify how much health plan sponsors will pay PBMs for brand-name and

generic drugs. These prices are typically set as a discount off the Average Wholesale Price for brand-

name drugs and at a Maximum Allowable Cost for generic drugs, plus a dispensing fee. Contracts also

generally include fees for processing claims submitted by pharmacies (usually based on a rate per claim)

and fees for providing services such as disease management or utilization review. In addition, contracts

generally specify whether and how the PBM will pass manufacturer rebates on to the health plan

sponsors. The contracts can also include performance guarantees, such as claims processing accuracy

or amount of rebates received.

Currently, approximately 70 PBMs operate in the United States and manage prescription drug benefits for

health plan sponsors. One industry stakeholder estimates that PBMs manage prescription drug benefits

for approximately 95% of health insurance beneficiaries nationwide. The largest PBMs include CVS

Caremark Inc, Medco Health Solutions, Inc, Express Scripts; and Walgreens Health Initiatives, Inc;

What role do PBMs play in the prescription drug industry?

PBMs are sometimes referred to as the middlemen in the prescription drug market because they act as

intermediaries between health plan sponsors (Payers) and drug manufacturers and pharmacies. As

shown in Exhibit 2, PBMs negotiate with drug manufacturers and pharmacies on behalf of plan sponsors

(Payers). These negotiations include provisions for cash placed on health plan sponsor formularies (lists

of approved drugs for prescribing) and the volume of these drugs that are used by health plan

beneficiaries. PBMs also contract with pharmacies on behalf of plan sponsors (Payers) to establish how

pharmacies will be reimbursed for prescriptions they dispense to health plan sponsor beneficiaries.

The clients of a PBM are primarily major employers, insurers and managed care organizations. The client

works with the PBM to decide the pharmacy benefit (i.e., insurance coverage for prescription medication)

that it will offer, including the drugs that will be covered, the beneficiary‘s cost sharing requirements, and

the pharmacy network. The client then retains the PBM to administer the pharmacy benefit for its

members or employees. The consumers enroll with the Payers in their prescription drug program. The

consumers fill prescriptions at the PBM‘s network pharmacies and the pharmacy dispenses the drug.

One of the primary reasons clients retain PBMs, is that PBMs reduce the cost of offering a pharmacy

benefit. PBMs do this by automating administrative services, obtaining discounts on drugs (ingredient

cost), and managing drug utilization. For example, PBMs:

Reduce administrative cost by using a highly automated environment to electronically process

claims at the point of service (e.g., pharmacy where prescription is dispensed). Over 99% of

pharmacy claims are processed in this manner, at an average cost of $.30 to $.40 per claim.

Reduce ingredient cost by obtaining pharmacy-pricing discounts from dispensing pharmacies,

and rebates from pharmaceutical manufacturers. These discounts are obtained under contracts,

and shared or passed on to clients. The cost of prescriptions, which average around $60.00, can

be reduced as much as 30% to 35% by a PBM‘s programs.

Manage utilization and favor lower cost medications by using clinical services that influence the

behavior of the physicians, pharmacist and patient.

Over the last 10 years the PBM industry has grown dramatically, and undergone several major

restructuring trends. These trends include:

Explosive growth of the PBM industry into the mid-1990s as managed care organizations,

insurers and later self insured employers sought to reduce the cost of their pharmacy benefit by

contracting with PBMs to receive manufacturer rebates and pharmacy network discounts;

Acquisition of several leading PBMs by manufacturers in the early 1990s (Merck- Medco,

SmithKline Beecham-DPS, and Lilly-PCS). These acquisitions were the result of manufacturer‘s

concern over losing access to the lives managed by the PBM, and were partly prompted by the

proposal of healthcare reform under the Clinton Administration. Since the number of lives covered

by the PBM drove up the premium paid by the manufacturer, PBMs took on additional lives in an

effort to become an attractive acquisition candidate. To do this, PBMs lowered their claims

processing fees and rebate retention rates, and in some cases assumed risk for the cost of the

pharmacy benefit. As a result of these actions the industry took on unprofitable business.

In the mid-1990s, the business matured and manufacturers realized they were not receiving the

expected value from their PBM acquisitions or rebate payments. Most manufacturers increased

the performance criteria for PBMs to earn rebates. PBM profits, already hurt by the acquisition

frenzy in the early 1990s, were further impacted by the reduction of rebates from manufacturers.

As a result, PBMs introduced expanded services that differentiated them as clinical and

pharmaceutical cost managers and began to scrutinize their unprofitable clients.

In the late 1990s through the present, the PBM industry has been restructuring to restore profits.

Lilly and SmithKline Beecham divested their PBMs, and the industry has seen consolidation as

the leading PBMs seek to achieve economies of scale and improve profitability, as well as

increase their negotiating power with manufacturers and retail pharmacies. The most significant

consolidations include Advance Paradigms acquisition of PCS, and Express Script‘s acquisitions

of ValueRx and DPS.

The industry now appears to be stabilizing, and is focused on managing costs and utilization for its

clients.

2. History of PBM

Most health plan sponsors – employers, HMOs, insurance carriers and others – provide a prescription

benefit as part of overall health insurance coverage. Because of the increasing size and complexity of

pharmacy benefits, many plan sponsors contract with companies known as Pharmacy Benefit Managers

(PBMs) to administer the process for them. PBMs are third-party administrators of prescription drug

benefits. They handle such administrative tasks as collecting funds from health plan sponsors and using

those funds to pay providers, processing claims; answering questions posed by pharmacists, doctors and

health plan participants; and negotiating with drug companies. They operate mail order pharmacies which

they force an increasing number of plan participants to use. PBMs have become a dominant, rapidly

growing force in the pharmacy industry.

Three PBMs control about half of America‘s prescription drug transactions: Medco, Express Scripts and

Caremark. They have become a lightning rod for controversy because of business practices described

below. Moreover, while PBMs represent themselves as prudent managers of drug benefits, prescription

drug benefit costs to health plans are doubling every five years. At the same time, the major PBMs enjoy

robust profits. Their business model yields incredibly high margins, largely at the expense of their

customers, their recipients and their pharmacy providers.

2.1 Origin of PBMs

Pharmacy Benefit Managers initially were formed in the 1960s when prescription drug benefits became

available to employees, retirees and their dependents. The first significant medication benefit began in

1970 under a collective bargaining agreement between the United Auto Workers and vehicle

manufacturers. At the outset, PBMs were simply pharmacy third-party administrators, manually

processing paper claims for a per claim fee. PBMs came into being four decades ago, when employment-

based health benefits were gaining wide adoption. They trace their roots to the following four sources.

Prescription Drug Cards

In the 1960s companies emerged to offer add-on prescription drug benefits to private health insurance

plans—most notably, those for unionized workers. Card holders could fill prescriptions at participating

pharmacies for nominal copayments. Pharmaceutical Card System (PCS) is commonly identified as the

innovator of this concept.

Mail-service Pharmacies

Around the same time cards appeared, specialized pharmacies were established to dispense medications

for chronic conditions by mail. Mail service offered discount pricing because of low overhead and the

convenience of home delivery. An early leader was PAID Prescriptions, the progenitor of today‘s Medco

Health.

Third-party Drug Claims Administrators

Companies such as Argus were created to fill a need for low-cost processing of drug claims. With the

typical drug claim originally being quite small relative to a hospital or physician claim, insurers outsourced

processing to specialists to keep processing costs for drug claims about the same in percentage terms.

Today the cost of processing a drug claim is about thirty to forty cents, less than 1 percent of claim value.

Health Insurer Pharmacy Benefit Department

Some top health insurers and managed care firms have separately branded their in-house pharmacy

benefit units. Most remain with the original parents—for example, WellPoint Pharmacy Management,

Aetna Pharmacy Management, Anthem Prescription, and PacifiCare‘s Prescription Solutions—but serve

other customers, too. Sometimes insurer-owned PBMs are spun out as separate companies: United

Healthcare‘s Diversified Pharmaceutical Services (DPS) was acquired in the early 1990s by a

pharmaceutical manufacturer and later was absorbed by Express Scripts, a company that itself was

created inside New York Life‘s managed care unit.

Notwithstanding their different origins, today‘s PBMs have all developed comparable full-service

capabilities. Much of the buildup of capability and capacity has come via consolidation. There are now an

estimated forty to fifty companies of meaningful size in the PBM field, although three firms dominate:

Caremark Rx, Medco Health Solutions and Express Scripts.

2.2 Evolution of PBM Industry

As HMOs emerged in the early 1990s, they sought to clamp down on drug costs within their networks. So

they started restricting their formularies, or lists of prescriptions they would cover. And they began hiring

outside companies (pharmacy benefit managers) to play a two-step supply-chain game. First, the PBMs

obtained volume discounts from companies that made the drugs the insurers still did cover. Second, they

pressured doctors and pharmacists to herd patients onto those medications. Taking cash from both the

drug companies and the insurers, PBMs grew into extremely powerful, profitable middlemen.

By January 2006, the three largest PBMs — Medco Health Solutions, Caremark (which has announced a

merger with CVS) and Express Scripts (which is also seeking to merge with Caremark) — were

processing prescription benefits for more than 150 million patients and generating combined revenues of

$89 billion. And over the past year, PBMs have been able to extend their business model into the

Medicare population. That's because the government doesn't run Part D directly, the way it operates

Medicare's hospital, physician and home health care programs. Instead, beneficiaries join private drug

plans, which buy pharmaceuticals, dispense them and get reimbursed by Medicare, and those plans are

using PBMs to obtain drugs and set formularies.

PBMs offer pharmacy management services similar to those of an internal pharmacy department, but

these services are on a contract basis and a grander scale. Why did PBMs develop if HMOs were

capable of developing their own internal programs? It is important to differentiate the types of MCOs and

purchasers of pharmacy benefits that became customers of PBMs. Typically, staff and group model

HMOs with owned medical centers and in-house pharmacies operate their own pharmacy benefit

management programs without using PBMs (although some may use the claims-processing services of

PBMs). However, when staff and group model plans add an independent practice association (IPA) or

network model component, they may use a PBM to manage the community network, mail service and

other management components. Therefore, customers of PBMs are generally those that do not own their

own pharmacies but rely on a community pharmacy network or mail service for delivery of the prescription

benefit. These customers are typically IPA and network HMOs, PPOs, POS plans, managed in-demit

programs, state Medicaid programs and self-insured employer groups. As a result of the growing need

for cost-efficient pharmacy benefit management within managed care, self-insured employer programs,

and Medicaid programs, PBM membership grew rapidly.

The PBM industry began to evolve when managed care principles, such as co-pays and provider

networks were applied to the pharmacy benefit in an effort to control costs. Growth in the PBM industry

was driven by manufacturer rebates, manufacturer acquisition of PBMs, and self-insured employers

seeking to reduce drug costs. Recently, the industry has focused on clinical services and consolidation in

an effort to improve margins, as well as negotiating power with retail pharmacies and manufacturers. The

evolution of the PBM industry as a managed care entity can be categorized into four major phases as

depicted in the diagram below:

Diagram – 1: The Four Major Phases

Phase I: Inception (1980 – 1990)

This Phase marks the beginnings of the PBM industry as managed care organizations carved out the

pharmacy benefit, and mail service. Pharmacy claims processing companies emerge;

Phase II: Dramatic Growth (1990 – 1994)

In this Phase there was a rapid growth in enrollment of managed care clients, penetration of the employer

segment, emergence of rebates and manufacturer acquisitions of PBMs;

Phase III: Scrutiny and Saturation (1994 – 1998)

Manufacturers divest PBM operations, rebates begin to diminish, and a large percent of the privately

insured population contracts with PBMs;

Phase IV: Consolidation and Repositioning (1998 – Today)

Industry consolidates to improve margins and market power and to realize economies of scale, while

facing increased pressure to manage client‘s drug spending and comply with new regulations.

Pharmacy Benefit Managers (PBMs) have evolved over the last three decades from basic claims

administrators to more complex organizations offering a wide range of prescription drug management

tools. The below diagram further explains the evolution of PBMs from small business offering single

services such as Claims Processing or Mail Order Pharmacy to a Total Health Management Company

offerings Advanced Services such as Evidence Based Formulary or Disease & Specialty Care

Management.

PBMs have evolved into a potent industry that has changed the face of pharmacy and made the large

PBMs extremely profitable. The following are some pointers to illustrate this.

PBMs now manage about 75% of all drug claims.

Claims processing is fully automated. Pharmacies submit claims directly from in-store computers

and they are processed online by the PBMs, typically in less than five seconds. In most cases,

the pharmacy receives payment from the PBM about a month after the prescription is filled.

While there are about 100 PBMs, three dominate the industry and manage over half of all retail

prescriptions.

The growth of PBMs has had a profound effect on the economics of retail pharmacy. PBMs have

used their marketplace dominance to ratchet down reimbursements, resulting in significant

savings to health plan sponsors – at the expense of drug retailers.

All of the large PBMs are huge, publicly traded firms. There has been considerable consolidation.

2.3 Evolution of PBM Services

While PBMs continue as pharmacy claims processors for plan sponsors, they have evolved into

something more. Some years ago they decided to act as principals in managing prescription claims, to

enable them to show ‗top-line‘ revenue for these claims. Accordingly, many believe the PBMs now act as

fiduciaries. But PBMs, as a rule, refuse to accept this responsibility because acknowledging this

expanded role would sharply curb many of their highly profitable business practices. This issue is at the

forefront of much of the litigation aimed at PBMs.

Diagram – 2: Evolution of PBM Services

PBMs typically offer the following capabilities, with different PBMs excelling in different areas.

Pharmacy Networks

PBMs contract with retail pharmacies to fill members‘ prescriptions. Pricing typically entails two

components: an ingredient cost, usually set at a discount from the most commonly used benchmark price,

the average wholesale price (AWP) for brand-name drugs or the maximum allowable cost (MAC) for

generics; and a dispensing fee, meant to compensate the pharmacy for its effort in filling the prescription.

The larger PBMs all contract with about 90–95 percent of the nation‘s nearly 60,000 retail pharmacies.

Mail Service

Most PBMs offer the option of mail service for maintenance prescriptions that do not need to be filled

instantaneously. A growing trend among employer-based plans is to mandate mail service for long-term

prescriptions or to strongly encourage its use through cost-sharing incentives. The top PBMs all run their

own mail-service operations, which are highly mechanized to speed processing and minimize labor costs.

Claims Administration

PBMs pay claims on behalf of plan sponsors and tell pharmacies how much cost sharing to collect from

beneficiaries. Some 98–99 percent of pharmacy claims today are paperless, because of the early

adoption of standards for claim formats and drug product identification through the National Council for

Prescription Drug Plans (NCPDP).

Formulary Management

Working through quasi-independent panels known as pharmacy and therapeutics (P&T) committees,

PBMs define lists of drugs approved for reimbursement by their clients. Formularies are set with both

clinical appropriateness and financial factors in mind. Where multiple therapeutically equivalent drugs

exist in a class of drugs, the P&T committee may designate which drugs are to be preferred. Preferred

drug lists often underpin benefit plan designs, whereby low-cost generic drugs demand the least

beneficiary cost sharing, preferred brand-name drugs require mid-level cost sharing, and non preferred

drugs have high cost sharing.

Manufacturer Price Negotiation

PBMs negotiate with drug makers for the prices of all of the drugs they manage. This is true even though

PBMs do not actually take possession of many of the drugs their enrollees consume: those dispensed in

retail pharmacies. Deals usually are structured to generate rebates from manufacturers based upon either

the total volume of drugs purchased or, for drugs in competitive therapeutic categories in which a PBM

may identify one drug as preferred, a percentage share of the market. PBMs profit in part by keeping a

share of the rebates. Large PBM clients—health plans and self-funded employers—increasingly demand

that PBMs pass more of the rebates through to them. PBMs‘ deals with manufacturers may also net

administrative fees for the PBM, such as for acting as the rebate conduit between the manufacturer and

the ultimate customer.

Utilization Review

PBMs may use their databases and real-time claim-payment technology to check for medication problems

at the point of dispensing: for example, adverse interactions between two or more drugs prescribed to a

patient, or over- and underuse, as when a beneficiary refills a prescription too early or too late. When a

problem is found, the PBM may alert the dispensing pharmacist or the prescribing physician(s). The same

data sets also allow PBMs‘ health plan clients to profile physicians‘ prescribing patterns.

Medication Therapy Management

Some PBMs also employ techniques to improve the quality or cost, or both, of pharmaceutical care. Tools

may include prior authorization requirements for selected drugs known to be prescribed widely for off-

label uses or to be costly compared to therapeutically similar alternatives; consumer education, such as

mailers discussing the conditions indicated by the drugs received by beneficiaries; physician education,

conveying evidence that counters pharmaceutical manufacturers‘ detailing; compliance and persistency

programs meant to make sure that patients actually take their medications; and disease management

programs, which enroll patients having targeted chronic conditions and help them manage those diseases

to avoid flare-ups.

Electronic Prescribing

Not yet widely adopted but strongly encouraged by MMA provisions, electronic prescribing allows

physicians to write prescriptions directly into computers or wireless handheld devices. The device shows

current information on patients‘ eligibility, coverage, and formulary limitations, which may help in choosing

the most appropriate drug that, will cost the patient and the payer the least. The prescription can be

transmitted instantly to the patient‘s chosen participating pharmacy and to the PBM for payment at the

same time. The major PBMs have created an electronic prescribing utility, RxHub, to distribute formulary

and medication history information. Similarly, the top pharmacy chains have created a mechanism called

SureScript to transmit prescriptions between physicians and pharmacies.

Service Enhancements

With the market for PBM services largely saturated, PBMs are growing via service enhancements. A

recent industry thrust has been into higher-margin specialty pharmacy—that is, drugs used by small

numbers of seriously ill people who require costly, often hard-to-deliver medications via injection or

infusion. Many such drugs are physician-administered and are already covered under Medicare Part B.

Traditionally physicians purchased these drugs and then billed payers, including Medicare, at prices well

above the acquisition cost. To control costs, some health plans now buy directly from specialty

pharmacies, which then deliver the drugs to physicians‘ offices.

3. PBM Services

PBMs may provide administrative services, clinical services, or both types of services to their clients, and

may manage the retail pharmacy, mail pharmacy, or ―integrated‖ (mail and retail) benefit.

3.1 PBM Administrative Services

PBM‘s Administrative services include client services, pharmacy network administration, mail pharmacy,

claims adjudication, member services, and manufacturer contracting and rebate administration.

Client Services

Client services include benefit administration, eligibility administration, and reporting.

Benefit Administration

Benefit administration is the administration of drug benefit designs. It includes setting up and maintaining

drug coverage and exclusions, setting limits on drug coverage, and defining member cost sharing

requirements (co-pays).

Benefit plan designs specify the prescription drugs that are covered. A drug benefit plan typically covers

ethical pharmaceuticals. Ethical pharmaceuticals are drugs approved by the Food and Drug

administration (FDA) for treatment of specific disease states specified by the FDA. Ethical

pharmaceuticals require prescriptions. Cosmetic and lifestyle are generally excluded from the drug benefit

(members pay for excluded medications themselves). Biotech injectables, infused medications, and other

medications dispensed at an inpatient setting are typically covered under the medical benefit, and not

included in the drug benefit.

Clients may maintain several drug benefit plans. This allows them to offer different coverage for

populations with different needs (e.g. exempt, non-exempt, retirees and their dependents). Clients can

vary benefit design by employee type, such as exempt versus non-exempt or part-time versus full-time.

Clients may extend pharmacy and medical benefits to qualified retirees. Typically, retirees‘ cost sharing

requirements and coverage limits differ from active employees. Coverage is typically extended to

members and dependents of active employees. Dependents are typically defined as a member‘s spouse

and their children. Coverage of children can vary by age and whether or not the child is in college.

Beyond a defined age limit, children are no longer considered dependents and are excluded from

coverage under their parent‘s pharmacy benefit.

Benefit plans also specify how members share the cost of their drug benefit with their employer or group

(co-pays, co-insurance, and deductibles). These cost sharing arrangements are often used to encourage

members to select generics or lower priced drugs. Co-pays are fixed amounts that members pay for every

prescription. Co-pays can vary depending on whether the prescription is dispensed from a mail pharmacy

or retail pharmacy, whether a brand or generic is dispensed (i.e. a two-tier structure), and whether the

drug is featured on the formulary (i.e. a three-tier structure).

Coordination of benefit (COB) programs – the practice of coordinating coverage for members eligible for

more than one pharmacy benefit – are not typically administered by PBMs because the cost savings have

proven insufficient to warrant the administrative cost and burden to the member. COB programs typically

require members to submit paper claims to their primary insurer. Once the primary insurer has paid and

provided an explanation of benefits, the member is then required to submit a paper claim to the

secondary payer for any outstanding amount. Most clients functioning in the secondary payer capacity

choose to pay whatever out-of-pocket expenses the primary payer has not covered, but some apply their

own co-pay amounts.

Most of the leading PBMs offer a COB program. As stated above, none of these programs are

administered on a ―real time‖ basis (e.g., at the time a claim is submitted from the point of service for

adjudication), but rather rely on paper claims. There is typically an added administrative charge for COB

programs.

In one of the Industry reports, several leading PBMs have stated that there appears to be increasing

interest in COB, as clients look for ways to stem the rising costs of drugs. In general, clients with the

―richest‖ benefit plans (e.g., broad drug coverage, low co-pays) and employees eligible for drug benefits

elsewhere, stand to benefit the most from implementing a COB program While some drug benefit plans

still use a single co-pay structure (e.g. $5–$10) for all prescriptions, some use a two-tier differential co-

pay structure that differentiates branded drugs from generics. Under this structure, members pay lower

co-pay amounts (e.g. $5– $15) for generic drugs and higher co-pay amounts ($10–$25) for branded

drugs. In addition, most drug benefits plans include a three-tier co-pay structure that differentiates

branded, generic, and non-formulary. Under this structure, members not only pay differential co-pay for

brand ($10–$25) versus generic ($5–$15), but also pay higher co-pay for using non-formulary drugs

($15–$50). Non-formulary drugs are usually branded drugs for which the PBM does not receive

manufacturer rebates. In the spring of 2000, 80% of pharmacy benefit plans offered three-tier co-pays, a

significant increase from 36% in the spring of 1998.61 Some clients also use a fourth co-pay tier for

lifestyle and/or ―biotech‖ drugs. Clients often require a 50% co-insurance for drugs in this tier, thereby

requiring the member to pay one-half the cost of the drug. (The most restrictive plan designs only cover

formulary-listed products, and typically require a generic be dispensed if available. Non-formulary drugs

are excluded from the benefit. These plans are favored by HMOs that have assumed risk for the cost of

their members‘ drug benefit.

Co-pays are usually comparable for mail and retail, even though retail pharmacies typically fill a 30-day

supply of prescriptions. Mail pharmacies fill a 90-day supply of the same prescription for the same co-pay

or one that is only modestly higher (typically twice retail); the overall cost to the member is generally one-

third lower through the mail pharmacy. This encourages the member to use the mail pharmacy, where

deeper discounts off the ingredient cost are found than in retail pharmacies, thereby reducing the cost of

the pharmacy benefit.

Co-insurance - members pay a fixed percentage of the cost of each prescription. Typically, the co-

insurance percent (usually 20%) is fixed irrespective of the type of drug dispensed (brand, generic, or

non-formulary). However, many clients are moving toward differential co-insurance based on the category

of drug. For example, members pay 10% for generics, 20% for branded and 30% for non-formulary. This

type of cost sharing has been a traditional feature of indemnity programs, but not widely used in PBM

administered plans.

Deductibles—the amount of money a member has to pay out-of-pocket before the drug benefit program

begins—may be used in conjunction with co-insurance and co-pays. For example, some drug benefit

plans include a $50 annual deductible. The member is responsible for all drug costs equal to $50 or less.

Once annual drug cost exceeds $50, the member only pays the relevant co-pay or co-insurance.

Pharmacy costs are often included as part of a member‘s total medical benefit. Clients may establish

maximum annual benefit limits on the amount they will pay for medical (and pharmacy) costs per year

(e.g. $1 million).

Eligibility Administration

Client services include enrollment and eligibility administration services that assist clients in registering

their members and dependents for the drug benefit. PBMs generally do not register members and their

dependents for their drug benefit. The clients handle this process, as well as the collection of member

premiums, and provide the PBM with enrollment and eligibility information. Key information a PBM

receives from its clients for an eligible member includes name, unique identifier, age, sex, date of birth,

and benefit plan. An eligibility file is created from this information, which is used to verify the member‘s

eligibility for coverage during claims adjudication.

Enrollment activity for the PBMs peaks in June and December, as these months are typically the

enrollment periods prior to the beginning of a client‘s new benefit plan year. Eligibility updates are

provided on an ongoing basis for major life events (marriages, births, and deaths), and to account for new

and terminated employees. PBMs typically require several weeks to map and load a new enrollment file,

and one or two days to administer eligibility changes.

Currently, no industry standard exists to support enrollment or eligibility maintenance processes. PBMs

receive enrollment information in a variety of formats, including floppy disk, magnetic tape, and hard copy.

Although PBMs generally require the same information (e.g., name and date of birth), each PBM has

developed its own standard. In addition, clients often provide this information in their own formats,

requiring the PBM to map the data into the eligibility file used during claims adjudication.

Reporting

As an aspect of client services, PBMs provide their clients monthly, quarterly, and annual reports that

focus on drug utilization, drug cost, and service issues. The client and the PBM, to anticipate and manage

utilization trends and costs, use these reports and combine them with information about trends in drug

development (new drugs on the market, patent losses, etc.).

Monthly reports provided to clients typically include standard cost, utilization, and performance indicators.

These include claims data such as total drug cost, total ingredient cost, total cost sharing, total cost

savings from generic and therapeutic substitution programs and denied claims, and reports that list the

top pharmacies by cost, top prescribers by cost, and top drugs by cost. Quarterly executive summary

reports often provide trend data that includes member demographics, plan cost sharing averages,

average ingredient costs, brand/generic dispensing rates, retail network performance, and mail pharmacy

performance. Annual reports typically summarize the plan‘s performance during the year, and often

include a statistical summary of cost, utilization, and service indicators. In addition, these reports provide

a more detailed analysis of the effectiveness of specific programs, such as maximum allowable cost

(MAC) pricing and utilization and formulary management programs. PBMs will provide ad-hoc or

customized reports to clients for an additional cost. PBMs typically charge per hour fees for computer

programming and other resources required for producing these reports.

Client Service Support

PBMs assign a client service team to support their largest clients (smaller clients are typically assigned an

account coordinator). The client service team is the primary contact for the client to coordinate enrollment,

benefit set up, and administration, member communications, and issue resolution. Client service teams

can be dedicated or non-dedicated. Dedicated teams exclusively service specific clients for an additional

cost; non-dedicated teams provide general support to many clients.

Pharmacy Network Administration

Pharmacy network administration maintains the PBM‘s extensive network of pharmacies. This includes

network development, network contracting, reimbursement, and pharmacy audits.

Network Development

To fill their members‘ prescriptions, PBMs develop and maintain a network of chain and independent

retail pharmacies, supplemented by mail and specialty pharmacies .PBMs offer their clients a choice of a

standard pharmacy network, or a customized network.

A standard network provides national coverage, and is the network frequently selected by clients.

A customized network allows a client with regional or unique needs to receive deeper price discounts

than the PBM offers through its standard network, but at some inconvenience to the members. In general,

the deeper the discount, the fewer the pharmacies that are willing to participate in the network and the

farther a member will have to travel to get a prescription filled.

Pharmacy networks are designed to provide good access to retail pharmacies at the lowest cost. The

more restrictive a network (less access), the better the discounts. In some cases PBMs can reduce the

number of retail pharmacies in the network by 20%, obtain better pricing, and yet still meet their

contractual obligations regarding pharmacy access— typically 1–5 miles from a member‘s home in urban

and suburban areas.

Most PBMs require their network pharmacies adhere to the policies and procedures of the PBM, such as:

Reasonable hours of operation,

Promotion of generic substitution,

Adhering to a pricing formula, and

Submission of U&C charges.

Additional requirements typically include:

Submission of electronic claims, using the latest NCPDP format;

Active membership in the National Association of Boards of Pharmacy (NABP) (The

numeric identification number assigned to the pharmacy is verified by the NCPDP);

State licensure of the pharmacy and pharmacists, with the licenses clearly displayed at

the pharmacy;

Evidence of a valid tax ID number and an active DEA number;

Proof of professional liability insurance;

Demonstration that all prescriptions are dispensed in accordance with applicable state

laws;

Maintenance of a customer signature log; and

No claims, settlements or judgments outstanding.

Network Contracting and Reimbursement

PBMs contract with pharmacy chains at the national level and with independent pharmacies directly, or

through Pharmacy Services Administrative Organizations (PSAOs). PSAOs are group purchasing

organizations for smaller, independent pharmacies. PSAOs improve contracting efficiency for

independent pharmacies, and allow them to contract with PBMs at discount rates that are comparable to

those received by larger, retail chains. Key terms of these contracts include the pharmacy reimbursement

rates and timing, the PBM‘s right to audit, and minimum performance requirements, such as generic

dispensing rates. Pharmacies are reimbursed (with the cost passed onto PBM clients) the ingredient cost

of the drug dispensed plus a dispensing fee, less the member‘s co-pay by the PBMs. As a result, the

PBM is not at risk for the cost of the drugs. Retail pharmacies are reimbursed either every week or every

other week. At the time of claims adjudication, the claims processing systems sets the amount the

pharmacist will be reimbursed.

PBMs typically guarantee an overall pharmacy network reimbursement rate for their clients, and

separately negotiate reimbursement rates to pharmacies that allow them to meet client commitments. The

actual rates the PBM receives will vary by pharmacy chain and network. The PBM may contract with

certain pharmacy networks for deeper pricing discounts and lower dispensing fees than it is obligated to

provide its clients. In other cases, the pharmacy discounts are less favorable relative to the contracted

rates a PBM receives from its clients. If the PBM is successful, it retains the margin while meeting its

contractual obligations.

Pharmacy Audits

PBMs retain the right to audit retail pharmacies participating in their PBM network. This enables the PBM

to monitor, deter, and recover fraudulent or erroneous claims. The right to audit is stipulated in the

contract the pharmacy holds with the PBM. Studies have found that approximately 3% of claims

submitted to PBMs from retail pharmacies are fraudulent, and 2% are claims for which payment should

have been denied. Audits of retail pharmacies are a standard service PBMs provide their clients.

Pharmacies with higher than normal ―abuse indicators‖ are typically targeted for an onsite audit. PBMs

use a variety of utilization and cost reports to identify likely abusers and then target them for audit.

Indicators of abuse include high average prescription price, high refill percentages, and high volumes and

utilization.

Audits can be categorized into ―off-site,‖ which includes ―desk-top‖ and ―real-time,‖ and ―on-site. Desktop

audits identify and detect patterns of abuse using statistical probabilities for 20–30 key indicators.

Examples of these indicators include the brand to generic dispensing ratio and the average pills

dispensed per script. Desktop audits are used to monitor the pharmacy network, and prioritize

pharmacies for on-site audits.

Real time audits enable PBMs to quickly identify erroneous or fraudulent claims and mitigate the potential

for overpayment. For example, a pharmacy that submits two prescriptions for the same drug at the same

time as opposed to one prescription could receive a phone call questioning whether this should be

submitted as one prescription, thereby reducing the dispensing fees paid and co-pays collected. Real

time audits save the PBM the time and expense of an on-site audit, and have a sentinel effect on the

pharmacy network; they also act as a safeguard against wider fraud and abuse. Criteria for real time

audits are built into the claims adjudication process. Claims selected for audit are routed to the retail

pharmacy operations group, from which the outbound phone call is placed.

On-site audits are limited to pharmacies suspected of heavy abuse. These audits are expensive for the

PBMs, and often require the use of outside auditors and consultants. During an on-site audit, the

prescription records maintained by the pharmacy are reviewed and compared to the information provided

via the claims processing system.

A research conducted on some of the leading PBMs found that they each perform 30,000–40,000

desktop audits and 500 – 1,500 field audits annually. These audits resulted in the annual removal of

between 5 and 15 retail pharmacies from the PBM‘s network, and the recovery of millions of dollars from

false or erroneous claims. Most of the PBMs sent the recoveries back to their clients; however, some of

the PBMs retained a portion of the recovered monies to cover their costs.

Details regarding PBM audits and results are considered proprietary and confidential to the PBMs.

Mail Pharmacy Operations

Most pharmacy benefit plans offer a mail pharmacy service as a way to promote cost savings and

improve access. The cost savings and convenience of mail pharmacies are particularly attractive to

seniors with chronic conditions that require long term medications. Since there is a delay in receipt of

medications via mail pharmacies, mail pharmacies are appropriate for long-term medication for chronic

illnesses.

PBM Ownership of Mail-Order Pharmacies

A PBM that owns a pharmacy (whether retail or mail) is considered vertically integrated. A vertically

integrated PBM may have a greater ability to influence which drugs are dispensed under the plans it

administers than a non-vertically integrated PBM. If plan sponsor contracts with PBMs do not properly

align the incentives of PBMs with those of the plans, this lack of alignment could create a conflict of

interest. Potential conflicts of interest should be rare,

The economic literature on vertical integration suggests that it can lower costs. First, integration can

reduce transaction costs. In addition, it also avoids double markups (or what economists call ―double

marginalization‖) in which two independent, vertically related firms each have some ability to charge

above marginal cost.

PBMs own most mail order pharmacies, allowing the PBM to promote cost savings for its clients and

members, increase formulary control, and drive compliance. A PBM that owns a mail-order pharmacy

may have an incentive to charge a lower overall price for the product than two independent entities

setting prices optimally.

Members may be encouraged (through the co-pay) or required to use mail pharmacies when appropriate.

Mail pharmacies also enable PBMs to promote cost savings for their clients through logistic and fulfillment

of economies of scale: economies of scale include lower acquisition cost due to volume purchasing,

larger dispensing quantities, and therapeutic substitution programs. The pricing discounts offered through

mail pharmacies are larger and the dispensing fees lower than those offered through retail pharmacies.

Mail pharmacies also provide the PBM an opportunity to intervene with therapeutic substitution programs

before a prescription is filled, thereby facilitating the use of less expensive medications.

Mail order pharmacies typically dispense a 90-day supply of drugs at two-thirds the co-pay for three 30-

day supplies at retail. For example, consumers who use mail pharmacies will often pay $10 for a 90-day

supply for a generic drug, but will pay $5 per prescription or a total of $15 for three 30-day prescriptions at

retail pharmacies.

Mail pharmacies also offer members the convenience of direct delivery to home or another desired

location. For seniors that have more than one address, the mail pharmacy helps eliminate the need for

the paper claims that may result from using a non-network pharmacy in remote locations. In addition,

members can easily request refills via the phone or Internet.

Mail-Order Pharmacy Process:

The major processes in a mail pharmacy are receipt, translation, therapeutic substitution, and fulfillment.

Receipt: In the typical mail-order program, the member mails their prescription and co-pay, along with the

necessary forms, to the mail pharmacy. The mail pharmacy receives and opens the mail, and deposits

the co-pay into a banking account. Co-pay remittances are typically restricted to money orders, credit

cards, or checks. This first process is commonly called receipt.

Translation: The next step in the process is translation. Here the prescription is entered into the claims

processing system for adjudication. If the prescription is illegible, the mail pharmacy will call the prescriber

for confirmation.

Therapeutic Substitution: Once in the claims processing system, the prescribed drug is evaluated to

determine whether a less expensive drug within the same therapeutic class can be substituted. If a

substitute is available and clinically appropriate for the member, the prescriber is contacted and asked if a

switch can be made. Claims for which drugs have been switched are re-adjudicated.

Fulfillment: Once the drug to be dispensed has been determined, the mail pharmacy can then pick,

pack, and ship the order. This process is called fulfillment. State-of-the-art mail pharmacies rely heavily

on robotics to automate this process.

The larger PBMs fill between 10 and 60 million mail prescriptions annually, with very low error rates (less

than 0.01%). On average, the members receive their prescription in about 10 days. Prescriptions are

typically mailed by an overnight delivery service. Prescription refills follow a similar process. Prescriptions

can be refilled over the phone or via the Internet. In addition, members can request that refills be mailed

to a different address than the original prescription.

Nonetheless, some have alleged that a conflict of interest arises when PBMs both administer the

pharmacy benefits for a client and sell drugs to a client‘s members via the PBM‘s owned mail-order

pharmacy. These ―self-dealing‖ arrangements purportedly would provide PBMs an opportunity to

manipulate drug dispensing at their mail-order pharmacies to enhance their own profits at the expense of

plans and members through the three business practices discussed above (lack of generic substitution

and dispensing, interchange to more expensive brand products, and repackaging of drugs into more

expensive units). One study concluded on the basis of high level data and theoretical calculations that

self-dealing could cost the U.S. Government and Medicare beneficiaries up to $30 billion during the

period 2004-2013.

Claims Adjudication service

One of the key services PBMs provide is the online adjudication of drug claims commonly referred to as

claims processing. This process examines the member‘s eligibility and drug coverage to determine the

pharmacy‘s reimbursement and member‘s co-pay. In addition, edits are applied to ensure the clinical

appropriateness of the drug dispensed, and to drive appropriate utilization.

In general, claims are processed at the PBM‘s corporate location. However, as a result of growth through

mergers and acquisitions, a portion of claims may be processed at the legacy company‘s corporate

headquarters site. In general, PBMs own and operate their claims processing systems.

At the point of service (POS), which can be the retail or mail pharmacy, the claims adjudication process

begins. Upon receipt of the prescription, the pharmacist enters it into the computer along with information

from the member‘s drug card. This information is then sent to the PBM‘s claims processing system via a

switch vendor. A switch vendor is an independent company that maintains the mailbox routing information

necessary to send a claim from a pharmacy to the appropriate PBM. Leading switch vendors include

Envoy Corporation, MedAmerica, and National Data Corporation. Switch vendors typically charge the

pharmacy a transaction based fee for their service.

Once the PBM‘s claim processing system receives the claim, the claim is adjudicated and the pharmacist

sent an electronic message confirming the member‘s eligibility and drug coverage, and stipulating the

amount the pharmacy is to be reimbursed and the co-pay to be collected. The PBMs paid claims file

stores the transaction for reporting and audit purposes.

During claims processing, the information submitted by the pharmacy is checked against the eligibility file

to validate the member‘s name, benefit plan, and birth date. Upon confirming eligibility, the prescription is

then checked against the benefit design to confirm drug coverage and the relevant co-pay/co-insurance

to be paid by the member. The claims processing system also determines the type of network pharmacy

submitting the claim (either mail or retail), and then calculates the appropriate reimbursement of

ingredient costs and dispensing fee the pharmacy will receive.

During the adjudication process, a series of edits are applied to the claim, with corresponding messages

sent to the pharmacist. These edits are intended to ensure the clinical appropriateness of the drug

dispensed, and to drive appropriate utilization. The edits can be either ―soft,‖ in which case the

pharmacist can override the edit, or ―hard,‖ in which case the pharmacist must take the appropriate action

or the claim will not be reimbursed.

Soft edits are advisory messages, which the pharmacists can act on or ignore. Many pharmacists ignore

soft edits because of a lack of time and/or incentives to counsel patients or call physicians. An example of

a soft edit is a message indicating the dispensing of a non-formulary drug.

Hard edits are messages that the pharmacist cannot override, and are an effective way to control a drug

benefit. The pharmacists or member assumes the cost of prescriptions filled contrary to a hard edit.

Examples of hard edits include, but are not limited to, messages indicating the prescription is being

refilled too soon, or that the drug being prescribed is subject to an ―NDC lock out.‖

A National Drug Code (NDC) lock out is commonly used by PBMs to control the dispensing of drugs

marketed under more than one name (e.g. Calan and Isoptin). The PBM typically contracts for rebates

with the manufacturer of one of the drugs, and uses an NDC lockout to prevent their members from

receiving the non-contracted drug. NDC lockouts are an effective way for a PBM to receive higher rebates

for the preferred drug, without clinically impacting their member‘s drug benefit.

The PBM industry uses a standard format for the electronic transmission of claims for processing. This

standard was created and is maintained by the National Council for Prescription Drug Programs

(NCPDP), and is available for a small fee. All PBMs and chain and independent pharmacies use this

standard.

Nearly all PBMs report that their claims processing systems have an uptime of 98–99%, excluding

scheduled downtime periods. All PBMs schedule downtime, typically a few hours every week or other

week for system maintenance.

Approximately 1% of all claims processed are paper claims. Paper claims are appropriate when unique

circumstances arise that prevent a claim from being processed electronically. For example, paper claims

may be required for new employees who are not in the PBM‘s eligibility system, or if a member is on

vacation in a remote area without a network pharmacy. In the case of a paper claim, the member pays for

the drug out-of-pocket and then submits the claim to their health plan for direct reimbursement, minus the

appropriate co-pay. Paper claims are entered directly into the claims processing system by the PBM.

PBMs charge for the administration of paper claims. Clients typically pay $0.25–$0.40 per electronic claim

processed. While many PBMs do not charge retail pharmacies claims processing fees, some do charge

retail pharmacies $0.02–$0.03 per processed claim. For paper claims, clients are typically charged

between $1.00 and $1.50 per claim processed.

Details regarding the edits and controls applied during claims adjudication are considered proprietary and

confidential to the PBMs.

Role of Switching Companies:

Organizations known as national pharmacy claims switch vendors (National Switches) evolved to act as a

focal point for pharmacy claims that were destined to go to the hundreds of different claims processors

that entered the market. These national switches, empowered by the NCPDP standards for pharmacy

claims format and content, provided a common phone number, a common communication protocol, a

source for a technical support for telecommunication problems, and a consistent level of service and

availability to the pharmacy. The national switches also contributed to the growth of pharmacy claims

processors and pharmacy benefits managers by allowing them to offer adjudication services without

having to support the communication needs of thousands of different pharmacies.

Today the national switches offer their services through ―legacy‖ dial-up communication mechanisms and

through these more modern, higher speed technologies. With these high-speed, high-capacity

communication technologies, more data can be exchanged between the pharmacist and other parties in

the drug distribution process. In addition, the dispensing process is improved; there is access to

increased information, improved drug utilization review algorithms, and other pharmaceutical care and

managed care initiatives. NCPDP and other standard-setting organizations have used the successful

model developed for the submission of pharmacy claims to bring the advantages associated with

electronic data interchange to other dispensing processes.

The ―SWITCH‖ also receives transactions from providers and intermediaries as claims pass from

providers to adjudicators. Switching companies accept claims, optionally perform format conversions,

may perform pre-editing, and then pass the claims to the appropriate processor. The reply from the

processor also may pass through the switch on its return to the provider. Providers utilize the services of

a switch for a number of reasons, including the following:

A processor may not support ―Dial-Up‖ communications

All claims can be transmitted to one central point, the ―Switch‖

Increased reliability of communications

Member Services

Shortly after enrollment, PBMs provide their members an information packet to help them understand

their drug benefit. This welcome packet typically includes:

Member‘s drug card

Drug coverage

Required co-pays

Benefit limits

List of local network pharmacies

Information on how to access their pharmacy network

Information on how to use the mail pharmacy, and

Submit a paper claim.

PBMs may also provide the member a copy of the formulary. PBMs typically produce the member‘s drug

cards, and allow their clients to customize the drug cards with a private label.

PBM‘s operate a member services call center that provides a 24-hour toll-free help line to answer benefit

questions, locate network pharmacies, or request additional forms and ID cards. The member services

department can provide dedicated or non-dedicated support.

PBMs also provide 24-hour toll-free support to pharmacies in their pharmacy network. Pharmacists call

the PBM‘s retail customer service area for assistance in entering the information needed for claims

adjudication, requesting prior authorization, and to ask questions that better help the member understand

their drug benefit or the pharmacist understand their reimbursement. Typical phone wait time for retail

customer service is less than 30 seconds. The call center and customer service representatives providing

member support are typically the same staff that supports the retail pharmacy network.

Manufacturer Contracting

PBMs contract with the manufacturers of branded drugs to receive rebates and administrative fees, in

return for the preferential treatment and increased market share of these drugs. Manufacturers pay

rebates and administration fees to PBMs, because PBMs can influence the drugs that their members use.

At a minimum, to be eligible for rebates and administration fees, manufacturers typically require PBMs to

include the contracted drugs on the formulary with no restrictions; the manufacturers may also require

PBMs to increase market share for their specific drugs above the national average. Additional

requirements may exist -- such as restrictions concerning competitor products or the implementation of

promotional programs (e.g. PBMs sending mailings to physicians and members encouraging the use of a

specific product). -- Depending on the drug and the manufacturer. Generic drug manufacturers do not

enter into these types of contracts because the PBM does not influence which generic brands are carried

at the retail pharmacy.

Rebates and administrative fees are commonly paid as a percent of the drugs wholesale acquisition cost

(WAC)—which represents the manufacturer‘s sale price—with rebates typically ranging from 5–15% of

WAC, and administration fees from 1–3%. Rebates greater than 15% are rare, since manufacturers may

set a new Medicaid Best Price, and are then required to rebate Medicaid claims at this level. Rebates and

administration fees are paid monthly or quarterly. Once a rebate claim is received, the manufacturer has

30–90 days to process and pay the rebate.

The allocation of rebates to the client is dependent on the clients‘ contract with the PBM. Some clients

receive all or a fixed percentage of the rebates collected. Other clients may receive a guaranteed rebate

the PBM is obligated to provide. PBMs are increasingly contracting with manufacturers for various rebate

levels —typically open, incented, and closed—by type of drug benefit used by the client. For example,

open formulary clients with limited control over the drug benefit might be offered a 3% rebate while a

closed formulary client is extended a 7% rebate.

PBMs also typically contract for pricing discounts and/or rebates for generic products (and some multi-

source branded drugs) stocked in their mail pharmacies. These pricing concessions are reflected in the

mail pharmacy pricing that the PBMs offer their clients.

Patient Assistance Program

Some pharmaceutical companies offer medication assistance programs to low-income individuals and

families. These programs typically require a doctor‘s consent and proof of financial status. They may also

require that you have either no health insurance or no prescription drug benefit through your health

insurance.

Patient assistance programs (PAPs) are programs set up by drug companies that offer free or low cost

drugs to individuals who are unable to pay for their medication. These programs may also be called

indigent drug programs, charitable drug programs or medication assistance programs. Most of the best

known and most prescribed drugs can be found in these programs. All of the major drug companies have

patient assistance programs, although every company has different eligibility and application

requirements.

Companies offer these programs voluntarily; the government does not require them to provide free

medicine

How do patient assistance programs work?

An individual gets an application for the drug company program that has the medicine the patient needs.

Information on medication available through patient assistance programs and the company programs

offering these drugs may be found on the websites. Many application forms are available on websites and

can be filled out directly on the computer or printed out.

Some companies programs require that a physician or heath care advocate (someone working in a

physician's office or in a clinic) get the form by calling the program. Many times in these cases, the patient

assistance program will screen for eligibility before sending out the form. The form that is sent will have a

patient specific identification number on it.

After the form is filled out and submitted to the company, the drug company will decide whether the

patient is eligible to receive the medication for free. If the patient is eligible, the medication may be sent to

the patient's home, the physician's office or a local pharmacy depending on the program. Some, but not

all, companies send letters letting patients and/or physicians know whether the patient has been

approved for their patient assistance program.

What are the eligibility requirements for patient assistance programs?

Eligibility varies program by program. Generally, individuals must have incomes under 200% of the

Federal Poverty Level, cannot have prescription coverage from any public or private source and must be

a U.S. resident or citizen. Some companies require that the patient has no health insurance.

Role of PBMs in PAP

PBM‘s manage patient assistance programs and earn a fee from the manufacturer for administrative and

pharmacy services for the delivery of certain drugs free of charge to doctors for their low income patients.

PBMs through their specialty and home delivery operations distribute pharmaceuticals in for patients

covered under Patient assistance programs.

Medicare Doughnut Hole and Patient Assistance Program

The term "donut hole" (or "doughnut hole") refers to a coverage gap within the defined standard benefit

under the Medicare Part D prescription drug program. Under the defined standard benefit package, there

is a gap in coverage between the initial coverage limit and the catastrophic coverage threshold. Within

this gap, the beneficiary pays 100% of the cost of prescription drugs before catastrophic coverage kicks

in.

Before reaching the doughnut hole in the Medicare Part D program, patients pay the first $250 for their

prescriptions, and then 25 percent of their drug costs for the next $2,000. After that point, plan

beneficiaries are in the doughnut hole coverage gap until their out-of-pocket costs reach $3,600. During

this time, beneficiaries pay 100 percent of their prescription costs. Upon reaching the $3,600 out-of-

pocket limit, Medicare Part D will begin covering a beneficiary's prescription drugs again.

Many drug manufactures offer free or reduced-cost prescription drugs to low income Part D enrollees in

the donut hole. Remember that drugs patients receive from a PAP may not count towards patients out of-

pocket costs.

3.2 PBM Clinical Services

PBMs use a variety of clinical services to help their clients control the cost and utilization of their drug

benefit. These services can influence the choice of prescriber, pharmacist, or patient, and can be

performed prospectively, concurrently, or retrospectively. Clinical services are intended to work in concert

with each other, and with the clients‘ drug benefit. The most common clinical services used by PBMs

include formulary management, therapeutic substitution, utilization management, and disease

management. Some PBMs also offer consulting services and emerging clinical management programs to

their clients.

PBMs use a variety of methods to engage patients, physicians and pharmacists in clinical services.

Telephone calls, written correspondence and faxes are the most common methods. In some cases e-

mails and face-to-face meetings (academic detailing) are used. In addition, pharmacies are routinely sent

electronic messages during claims adjudication.

Formulary Management

Formulary management is the process of developing and maintaining a list of preferred drugs, with the

intent of promoting cost-effective clinical care. A drug‘s position on a formulary is typically a prerequisite

for that drug to be eligible for rebates. PBMs use a variety of tools to manage pharmacy benefits, but the

formulary is the centerpiece around which the other tools work. The PBM or the client may manage the

formulary.

Development of Formulary System

The prescription formulary was developed initially as a management tool. Early on, hospitals realized the

need for an inpatient formulary. Without a listing of approved medications, there was no way a hospital

pharmacy could control its inventory and ensure that physicians would have an adequate and consistent

supply of medication for their day-to-day needs. In 1950, the Joint Commission on Accreditation of

Hospitals (JCAH) encouraged formation of a Pharmacy and Therapeutics (P&T) committee and the

development of a formulary system. By 1965, a P&T committee was required by JCAH before a hospital

could receive accreditation. As early as 1969, the Task Force on Prescription Drugs realized that while

"the use of a formulary is not a guarantee of high-quality medical care, rational prescribing, effective

utilization review, and control of costs... the achievement of these objectives in a drug program is difficult,

if not impossible, without it."

With the shift of health insurance toward managed care, insurers began to look at ways to control the

utilization of the pharmaceutical benefit. At the time, most plans had experience with formularies for

inpatient settings but not for ambulatory patients. The first approach was to have one unified formulary

that would be applicable to both inpatient and outpatient care. The MCOs soon realized that the most

efficacious product for an inpatient setting would not necessarily be the most appropriate therapy for

outpatient use. Quite often the cost difference between pharmaceuticals purchased in the hospital and

the same drugs purchased in a community pharmacy was tremendous. The cost of medication varied so

widely that an inexpensive medication in the hospital could be extremely expensive when purchased at a

retail pharmacy. So even though the same formulary might not have worked for both environments, cost

savings had been proven in hospitals and increasing prescription drug costs made formularies a

necessity for managing costs in the outpatient setting.

In addition to listing approved products, a formulary system should contain an educational component,

organizational policies on prescribing, and procedures for the use of certain medications. It should also

contain a drug use evaluation (DUE) process and, when appropriate, a drug utilization review (DUR)

component. Finally, the system must have a procedure for prior authorization to use non-formulary

medication when medically necessary.

A formulary is a continually updated list of branded (and generic) drugs favored by the PBM (or its

clients). Formularies often contain relative cost indices for comparable drugs, highlight preferred brands,

and include treatment protocols, usage guidelines, and other clinical information. Formularies are typically

distributed to primary care physicians, but patients and pharmacists may also receive them. Electronic

messages are often sent to pharmacists during claims adjudication indicating products that are non-

formulary. Formularies are typically produced yearly or every other year, with quarterly updates

distributed during the interim.

The P&T Committee

The cornerstone of the formulary system is the Pharmacy and Therapeutics committee. PBMs use an

independent Pharmacy and Therapeutics (P&T) committee comprised of pharmacists, clinicians and

physicians from different specialties. Most P&T committees evaluate the drugs in particular therapeutic

categories for clinical effectiveness and safety. In addition to evaluating all drugs currently on a PBM‘s

national formulary, most P&T committees evaluate therapeutic class reviews and new drug monographs

compiled from various public and private sources The P&T committee of the MCO can then take this

formulary, along with the clinical and financial research provided by the PBM, and develop its own subset

or custom formulary. Substantial public information is available about the efficacy of various prescriptions

drugs in each therapeutic class. Based on this and other information, a plan sponsor can decide whether

to accept a PBM‘s national or preferred formulary or to negotiate a custom formulary for its members. The

documents of several PBMs indicate that plans can customize certain aspects of a PBM‘s formulary. The

starting point for these formularies, however, is the PBM‘s national or preferred formulary list developed

by the PBM‘s P&T committee.

The PBM‘s or the client‘s Pharmacy and Therapeutics (P&T) committee decides which drugs are included

on a formulary, with the intent of discouraging the use of marginally cost-effective drugs. Given the

constant introduction of new drugs and the multiplicity of drugs in the same therapeutic categories, P&T

committees meet regularly to keep the formulary current. The first consideration of these committees is

the clinical effectiveness and safety of a drug. However, when multiple drugs exist with similar clinical

results, issues such as cost-effectiveness and maximizing manufacturer rebates determine which drugs

are included on the formulary.

Some P&T committees classify drug for formulary purpose as ―include in formulary‖, ―exclude from the

formulary‖, or ―optional‖. The P&T committee then ranks the drugs classified as ―optional‖ on clinical

effectiveness. Some PBMs claim that the P&T committee does not consider financial information,

whereas others may consider the market share of the ―optional‖ drugs and the likely customer reaction if

the PBM excludes the drug(s) or prefers certain drugs. P&T committees consider the availability of both

generic substitutes and therapeutic alternatives when deciding which drugs should be included in the

formulary and where they should be placed within various tiers on the formulary. After the rankings are

complete, the PBM decides which drugs to include on its preferred formularies.

Tiered Formulary

A ―tiered‖ formulary is one in which a member‘s co-payment varies by the tier on which the drug is listed.

On a typical 3-tier formulary the member‘s co-payment would be the lowest for the first-tier, which

includes generic drugs; somewhat higher for the second-tier, which usually includes preferred brand

drugs with no generic equivalent; and highest for the third-tier, which includes non-preferred brand drugs

or those brand drugs with a generic equivalent. Some plan designs include a fourth tier for drugs not

included on the PBM formulary and for so-called lifestyle drugs, e.g., drugs to combat hair loss. The

member would pay the entire cost of the fourth-tier drug, but it might be at a discounted price negotiated

by the PBM for its members. The ascending rates of the co-payments are designed to create an incentive

for the enrollee to choose the lowest cost, yet clinically effective, alternative. Similarly, a plan design may

include co-payment differentials depending on whether the prescription is filled at the mail-order or retail

pharmacy. Tiered formularies increased from 29% of covered workers in 2000 to 57% of covered workers

in 2002, with three-tier formulary designs dominating.

Formulary Types

Any P&T committee must first decide what type of formulary to administer. Formularies can be described

as open or closed. In addition, the committees can mandate the use of generic drugs, request

substitution, and designate who can prescribe and how much.

Open Formulary - An open formulary is a list of the drugs preferred, but not mandated, by

the PBM. Under this structure, all drugs are reimbursed regardless of formulary status. An

incented formulary applies three-tier co-pays (e.g., generic, formulary brand, and non-

formulary brand) or other financial incentives to influence patients to use formulary products.

Closed Formulary - A closed formulary is a limited list of drugs chosen by the P&T

committee. Only medications on this closed list will be covered by the prescription drug plan.

A closed formulary limits reimbursement to formulary drugs, and may require generics be

dispensed when available. Non-formulary drugs typically require prior authorization (based on

medical need) to be reimbursed. Closed formularies generally offer several choices in each

therapeutic category. When developing a closed formulary, the P&T committee must also set

up protocols for obtaining authorization to use a non-formulary medication. Such

authorization may require only a letter of medical necessity from the prescribing physician or

it may mean documenting treatment failure with the formulary medication before authorization

is granted. Closed systems require more effort than open systems, in that the physician must

choose a product from a limited formulary and pharmacists often must contact the prescriber

to adjust the prescription when the medication ordered is not on the formulary. Compared to

open formularies, however, closed formularies contribute to more rational and objective

pharmacotherapy, produce high rates of prescriber compliance, foster proper generic

utilization, assist in driving performance- or market share-based contracts with

pharmaceutical manufacturers, and may offer incentives to prescribers and pharmacists for

certain interventions.

Techniques to Ensure Formulary Compliance

PBMs utilize various techniques to ensure formulary compliance, including generic substitution,

therapeutic interchange, step-therapy and prior authorization protocols and reference based pricing. The

latter two are more recent techniques used by PBMs. As mentioned above, in deciding which drug to

include in the formulary (and their placement within various tiers on the formulary), the following two

practices are followed:

(i) Generic substitution and

(ii) Therapeutic interchange

Generic Substitution

Generic Substitution is the dispensing of a bioequivalent generic drug product that contains the same

active ingredient(s) as the brand drug and is, among other things, chemically identical to the brand

product in strength, concentration, dosage form and route of administration. Generic simply means that

the drug is not sold as the brand name. The use of generic drugs is now widely accepted and they are

commonly prescribed by physicians and dispensed at hospitals. While manufacturing generic drugs, the

drug companies use the same active ingredients and are shown to work the same way in the body, they

have the same risks and benefits as their brand name counterparts. Generic drugs are as safe as

effective as the brand-name medications. In other words, their pharmacological effects are exactly the

same as those of their brand-name counterparts. An example of a generic drug, one used for diabetes, is

metformin. A brand name for metformin is Glucophage. (Brand names are usually capitalized while

generic names are not.) A generic drug, one used for hypertension, is metoprolol whereas a brand name

for the same drug is Lopressor. Many people become concerned because generic drugs are often

substantially cheaper than the brand-name versions. They wonder if the quality and effectiveness have

been compromised to make the less expensive products.

The FDA (U.S. Food and Drug Administration) requires that generic drugs be as safe and effective as

brand-name drug. Both brands and generics are of the same quality, as their facilities have to meet the

same rigorous productions standards of Good Manufacturing Practice (GMP). Generic drugs are

considerably less expensive than the brand-name originals, because generic manufacturers do not carry

the investment costs for the development of a new pharmaceutical. The price of the generics is 30%-

80% lower than the price of the equivalent brand product. Generic medications provide a major benefit to

the society, as they ensure access to quality, safe and effective medicines. Increasing the range of

generic medications is essential for the healthcare. The healthcare systems save much money by

promoting the use of cost-effective generics. About 50% of all prescriptions in the United States, and

more than 40% of all prescriptions in Canada are filled with generic drugs.

Generic substitution generally occurs without prior physician authorization when a consumer presents a

prescription for a brand drug and the pharmacist fills the prescription with a generic version of the drug

product. Indeed, many states legally require generic substitution when a generic drug is available. In

contrast, dispense as written (DAW) orders on prescriptions for brand drugs require the pharmacist to

dispense the brand drug for which the prescription is written rather than a generic substitute. With DAW

orders, neither pharmacists nor PBMs have the discretion to substitute a generic drug for a brand drug

unless they contact, and persuade, the physician and/or patient to allow generic substitution.

Therapeutic Interchange

Therapeutic interchange is the substitution of one drug in a therapeutic class for another drug in the same

class. Therapeutic interchange occurs when a pharmacist substitutes a therapeutically equivalent, but

chemically distinct, drug product for the drug product specified on the member‘s prescription. There are

two types of interchanges. The first type involves brand drug-to-brand drug interchanges. For example, a

patient presents a prescription for the cholesterol-lowering drug Crestor, but the PBM, after obtaining

physician approval, fills the prescription with Lipitor instead. The second type of therapeutic interchange

refers to interchange of a generic version of a therapeutically similar brand drug for the prescribed brand

drug (e.g., generic Prozac is dispensed for a prescription for Zoloft). Brand name is the name under which

a new innovator drug is developed and marketed. When a pharmaceutical company develops a new

medication, they obtain patent for it. Brand-name drugs are usually given patent protection for more than

20 years. The patent protects the company investments (including research, development, marketing

etc.). When the patent expires, other companies can introduce its generic version.

Prior physician authorization is required before a pharmacist is allowed to interchange one brand-name

drug for another. PBMs institute therapeutic interchange programs to encourage plan members to use

formulary products or preferred formulary products. The formulary works in concert with the member‘s

drug benefit to determine which drugs are covered and the member‘s co-pay. Drug formularies vary in

their degree of influence and are classified as open, or closed.

Step-Therapy and Prior Authorization

Large PBMs and small or insurer-owned PBMs have used step-therapy and prior authorization programs

to lower prescription drug costs and increase formulary compliance. Step-therapy refers to plan designs

that will pay for certain more expensive drugs only if a physician first prescribes one or two less expensive

prescription or over-the-counter drugs prior to prescribing a more expensive single-source drug from the

same therapeutic category. Prior authorization refers to the requirement that the physician or patient

receive prior approval from the PBM before certain non-preferred drugs will be reimbursed by insurance.

Prior authorization often involves a clinical justification for the use of drugs that are prone to misuse or are

especially costly. If a plan allowed the PBM to institute step-therapy programs, the PBM could require that

a physician try two different generic non-steroidal anti-inflammatory drugs prior to prescribing a more

expensive branded product such as a Cox-II Inhibitor used for inflammation and associated pain. The

PBM could implement a step-therapy program by issuing point-of-service message that tell the

pharmacist that insurance coverage is blocked for certain National Drug Code (NDCs) or that certain

NDCs require prior authorization before the plan will pay for the prescription. Some PBMs are considering

step-therapy programs for other therapeutic categories and drugs, including ACE Inhibitors, Proton Pump

Inhibitors, Hypnotics, SSRIs, Enbrel (antirheumatic), and non-sedating antihistamines.

Reference-Based Pricing

Some PBMs are exploring the use of reference-based pricing, which would cap the amount they will pay

for a drug within a specific therapeutic class. According to one PBM, approximately a dozen therapeutic

classes, representing 40% of the total amount spent on drugs are composed of several drugs that are

similar in terms of safely and effectiveness, but vary significantly in price. Some PBMs are developing a

reference-based drug formulary that will establish a reimbursement level for each therapeutic class. For

example, a member could pay a small co-payment for products that are priced at or below the reference

price. If a product is more expensive than the reference price, the member pays the difference between

the product and reference prices. Control of formularies gives PBMs tremendous influence with drug

companies. The manufacturers typically compete and pay a combination of rebates and fees to secure

most favorable placement on a formulary. Drug manufacturers typically grant the following to the PBMs:

Access rebates for placement of products on the PBM's formulary;

Market share rebates for garnering higher market share than established targets;

Administrative fees for assembling data to verify market share results; and

Other fees and grants.

Therapeutic Substitution Programs

Therapeutic interchange/substitution refers to situations in which a pharmacy dispenses a preferred drug

rather than the prescribed drug. There are two types of interchanges. The first type involves brand drug-

to-brand drug interchanges (―brand-to-brand‖). For example, a patient presents a prescription for the

cholesterol-lowering drug Crestor, but the pharmacy, after obtaining physician approval, fills the

prescription with Lipitor instead. The second type involves brand drug-to-generic drug interchanges in

which a generic drug that is therapeutically equivalent, but chemically distinct, from the prescribed brand

drug is interchanged (―brand-to-different generic‖). For example, with the prescribing physician‘s approval,

generic Prozac is dispensed for a prescription for Zoloft.

Therapeutic substitution programs are typically operated in mail pharmacies to encourage physicians and

patients to switch to lower cost comparable drugs. Therapeutic substitution programs are used for two

reasons:

The P&T committee may have identified one drug as superior, and not a therapeutic equivalent to the

other drugs in a particular therapeutic category; or

The PBM has a contract with a manufacturer for rebates making one drug more cost effective than

other drugs in the same therapeutic category.

Therapeutic substitution requires the prescriber‘s permission, because the substituted drug may have

different side effects and drug interaction profile than the drug originally prescribed. Prescribers are

contacted via auto-fax or by phone. The patient‘s permission is also typically requested, but not required,

prior to substitution. For members that object, the PBM usually provides the originally prescribed drug at

no extra charge.

Most PBMs focus their substitution programs on new prescriptions received in their mail pharmacy, as

opposed to refills or retail prescriptions. PBMs target new scripts in the mail pharmacy due to the high

cost of chronic-illness medications, and the amount of time needed to switch the drug. Most PBMs fill

prescriptions received by their mail pharmacy within 72 hours. Also, it is easier to conduct Therapeutic

Substitution at mail than at retail because, at mail, the customer has no expectation of receiving the

prescription immediately. Thus, the mail-order pharmacist can obtain the prescribing physician‘s

permission for the interchange without the pressure of the patient standing at the pharmacy counter

waiting for the medication.

Given the time required to administer therapeutic substitution programs, and the acute nature of most

drugs dispensed in a retail setting, retail pharmacists do not typically engage in this practice. PBMs also

target new scripts due to the low success rate of repeatedly contacting a prescriber after they have

denied the initial request, as well as the risk of switching a patient that has been successfully maintained

on a drug for an extended time.

Some PBMs have attempted to develop therapeutic substitution programs for retail pharmacies. With

these programs, PBMs provide a financial incentive for the pharmacist to contact the physician and

request a substitution, with additional monies paid if the product is switched. The incentives are typically

paid in the form of higher dispensing fees. The time needed to contact physicians and the acute nature of

many of the medications dispensed make administering retail therapeutic substitution programs

problematic.

Utilization Management

PBMs use a variety of utilization management programs to lower drug costs and drive appropriate

utilization. These programs include prior authorization, drug utilization review (concurrent and

retrospective), academic detailing, and patient education.

Prior Authorization

Certain drugs require prior authorization before they are covered under the drug benefit. Prior

authorization is the pre-approval of a drug by the PBM before a pharmacy can dispense it. Currently, prior

authorization of prescriptions is used only for a few chosen drugs. These are drugs that are very

expensive and have major off-label uses not approved by the Food and Drug Administration, such as

growth hormones, or drugs that require medical justification before coverage is approved, such as Viagra

and Cox-2 Inhibitors. Before authorizing prescription of one of these drugs, the benefit manager asks the

physician about diagnostic tests, symptoms, and other clinical measures that would establish the

appropriateness of the drug according to evidence-based protocols. According to a recent study by Scott-

Levin the 10 therapeutic classes with the highest number of plans requiring prior authorization include

antifungal, migraine treatments, select pain medications, antidepressants, cholesterol reducers, alpha-

blockers, antiulcer/ulcer combinations, calcium channel blockers, sympathomimetic antiasthmatics, and

macrolides.

Drug Utilization Review

Drug Utilization review is a review program that evaluates whether drugs are being used safely,

effectively and appropriately. DUR is a technique used by prescription drug program administrators and

PBMs to manage drug utilization.

PBMs are often the only source of information for an enrollees total set of prescribed medications

because all network pharmacy purchases of prescribed drugs for an individual are held in one centralized

electronic file. This is especially important when enrollees are prescribed medications by more than one

physician or when enrollees use more than one retail pharmacy to purchase their prescriptions.

To assure appropriate utilization of prescriptions, as well as compliance with the benefit design, PBMs

perform drug utilization review (DUR) at the point of sale (concurrent DUR) and sometimes will also

conduct retrospective DUR.

Prospective/Concurrent DUR

This involves reviewing each prescription for an individual patient before it is dispensed to identify drug-

related problems such as

Drug-drug interactions (DDIs)

Drug-disease contraindications (when disease information is available or using surrogate indicators)

Refill too soon/excessive utilization

Drug-age conflicts

Drug-gender conflicts (e.g., drug pregnancy advisories)

Therapeutic duplication or other potential adverse drug events

At the point of sale, concurrent DUR involves a series of edits, or criteria, that are applied to a prescription

drug claim comparing information about the enrollee with the drug to be dispensed and information in the

database about other medications that the enrollee is taking. The DUR criteria and decision algorithms

are generally developed in consultation with the PBM‘s P&T Committee. Real-time computer link-ups

between the pharmacy and the PBM inform the pharmacist almost instantly whether there are any DUR

concerns before dispensing the medication. If a specific drug therapy is determined to be inconsistent

with the PBMs criteria and standards for appropriate utilization, specific actions may be taken. Actionable

DUR edits at the point of sale require resolution by the pharmacist, and may include contacting the

physician (e.g., to discuss any potential drug-drug interaction) or educating the enrollee. Common

concurrent DUR edits are: drug-drug interaction, drug-age (i.e., is the drug or dose appropriate for a

patient at a specific age?), and drug-gender (i.e., is a male being prescribed a contraceptive?). Some

PBMs, especially those that are part of an integrated health care system, may also have information on

an enrollees medical condition allowing a drug-condition edit (i.e., is the drug appropriate for someone

with diabetes?).

Retrospective DUR

This involves examination of drug use after the drug has been dispensed or post-drug therapy. This

Uses algorithms to identify patterns of noncompliance with clinical guidelines for drug dispensing.

Links clinical alerts to member profiles and sends data to prescribing providers to improve therapeutic

outcomes.

May focus on specific drugs and/or diseases programs.

May advocate member interventions

Should direct PBM how to proceed when it uncovers possible fraud and abuse by members or

prescribing providers.

Retrospective drug utilization review (RDUR) is the systematic analysis of prescribing patterns and

utilization based on past claims data. These programs assist PBMs in identifying physician-prescribing

patterns, identification of pharmacy fraud and abuse, and inappropriate or dangerous utilization patterns

of members. For example, a PBM may find as a result of retrospective DUR that a particular physician is

prescribing a brand name drug while most others in the area are prescribing the generic equivalent.

Retrospective DUR also can be used to educate physicians about a particular drug when new clinical

information becomes available (e.g., that a particular drug has been discovered to present serious risks

for some patients with certain underlying conditions). The communications from PBMs to the physicians

are typically via mail, fax transmissions, or phone calls. RDUR programs can help PBMs better target

patient and physician education programs and disease management programs.

Academic Detailing and Patient Education

PBMs make educational materials on specific diseases and wellness available to their members. These

materials range from simple monographs to Web-based, interactive programs. Typical education topics

include diabetes, thyroid conditions, heart disease, and asthma. PBMs have developed clinical consulting

and academic detailing programs in an effort to influence physicians‘ prescribing patterns. Detailing is the

practice of directly promoting drugs to physicians, a practice commonly used by manufacturers to

promote new branded products on the market. PBMs have modified these programs to educate

physicians about their prescribing patterns and to focus on the cost-effectiveness of alternative drugs.

AdvancePCS (acquired by CVS Caremark) had developed an academic detailing program that focuses

on physicians‘ prescribing habits, comparing them relative to their peer group. Focusing on high cost

therapeutic categories, pharmacists meet with physicians to educate them about their utilization patterns

and discuss cost saving strategies.

Disease Management Programs

People with chronic conditions generally use more health care services, including physician visits,

hospital care, and prescription drugs. Increase in the number of people living longer with chronic

conditions coupled with rising health care expenditures have spurred health plans, employers, and the

government to look for ways to reduce health care use and costs. Disease management is one approach

that aims to provide better care while reducing the costs of caring for the chronically ill.

Disease Management is a coordinated system of preventive, diagnostic, and therapeutic measures

intended to provide cost-effective, quality healthcare for a patient population who have or are at risk for a

specific chronic illness or medical condition.

PBMs use disease management programs as a proactive tool to control overall healthcare costs for

members with dominant, chronic conditions. Approximately 75% of PBMs offer disease management

program to their clients. The goal of disease management programs is to maximize the cost-effectiveness

of drug therapies and outcomes, while minimizing the total cost of treating the disease.

Disease management programs may result in higher drug costs due to increased compliance and

persistency, but are touted as lowering the client‘s overall healthcare expenditure. Most PBMs offer

disease management programs for common conditions such as asthma, diabetes, and congestive heart

failure. Manufacturers often support these programs, because they tend to increase drug utilization.

Nurses and pharmacists, hired by the PBM, administer these programs. These clinicians engage in an

ongoing dialogue with the patient concerning their condition, the disease‘s progress, and the patient‘s

compliance with their treatment regimen. Members are often sent education material and tools to help

them remain compliant. Members are required to sign-up for these programs with the client billed for the

service, or in some cases through a shared savings arrangement. PBMs charge for these services in a

variety of ways that typically include:

Per employee per month basis (approximately $2 PEPM);

Per participant per year (PPPY) basis (approximately $600 - $650 PPPY);

Per prescription basis (approximately $0.01/Rx) for each selected program (e.g., congestive heart

failure, hypertension). Services billed in this manner are intended to identify patients that may benefit

from the initiation of additional medications to their drug regimen, as recommended in national

guidelines and medical literature, with an overall goal of reducing total health care spending (e.g.,

medical and drug).

Per case per year (PCPY) basis for patient care management (approximately $300 PCPY) for

selected diseases (e.g., diabetes, asthma). Patient care management is intended to help patients

improve their health through lifestyle changes, drug education, and the optimal utilization of medical

services.

Disease management programs amount to additional costs to clients, beyond the PBMs standard service

offering.

Consulting Services to Payers and Employers

PBMs offer consultation and financial modeling to assist their clients in selecting benefit plan designs that

meet their needs for member satisfaction and cost control. The most common benefit design options

being offered to PBM clients are:

Financial incentives and reimbursement limitations on the drugs covered by the plan, including drug

formularies, tiered co-payments, deductibles or annual benefit maximums.

Generic drug utilization incentives.

Incentives or requirements to use only certain network pharmacies or to order certain maintenance

drugs (i.e. therapies for diabetes, high blood pressure, etc.) only for home delivery.

Reimbursement limitations on the amount of a drug which can be obtained in a specific period.

Utilization management programs such as Step Therapy and Prior Authorization that focus the use of

medications according to clinically developed algorithms.

The client‘s choice of benefit design is entered into PBM‘s electronic claims processing system, which

applies the plan design parameters as claims are submitted and enables their clients and PBMs to

monitor the financial performance of the plan.

Use of Internet and Physician Connectivity

PBMs have also expanded their services to the Internet offering clinical information for patients,

Physicians, and other care givers via their websites. Members using a PBM‘s mail pharmacy can have

their prescriptions filled or refilled directly over the Internet. In addition, some PBMs have developed

strategic alliances with Internet pharmacies, which enables members to purchase OTCs and other health

and beauty related products via Internet links to these sites.

As an example of PBMs‘ use of the Internet, Medco Health Solution‘s websites offers personalized

service to its members. The site is organized into four sections:

My Page – includes a message center, service alerts, refills reminders, important benefit information,

and client specific messaging;

My Health – offers personalized health content based upon the member‘s preferences and/or the

client‘s preferences;

My Benefits – includes information regarding the member‘s benefit design, co-pays, and formulary;

and

My Prescriptions – enables members to refill and renew prescriptions.

Another recent focus of some PBMs is physician connectivity. PBMs are developing systems, operated

through hand held devices that connect PBMs, prescribers, and pharmacists. These systems provide the

physician access to formularies, the Physician‘s Desk Reference and drug utilization review edits at the

time of prescribing. Once the prescription is written, it is transmitted electronically to the pharmacist.

Through this technology, PBMs hope to help physicians prescribe preferred medications, thereby

improving formulary and clinical compliance. The PBMs also hope to reduce dispensing errors through

incorrect pharmacist translation. Ultimately, physician connectivity is intended to reduce costs while

increasing physician, pharmacist, and PBM productivity.

In February, 2001, AdvancePCS (acquired by CVS Caremark), Express Scripts, and Medco Health

Solutions announced an agreement to form RxHub LLC, to develop an electronic exchange that allows

physicians using electronic prescribing technology to link to pharmacies, PBMs, and the health plans of

their patients. Today, RxHub delivers a universal, standardized communication framework that links

prescribers, pharmacies, PBMs and benefits plans for the purpose of sharing prescription benefit

information and exchanging prescriptions electronically.

Emerging Clinical Management Programs

Emerging clinical management programs offered by PBMs include contracting with specialty pharmacies,

as well as the use of the Internet as a portal for member and physician education and to provide

pharmacy related services and physician connectivity.

Specialty Pharmacy

While annual spending on traditional prescription drugs remains in the single digits, spending on specialty

drugs continues to increase at double-digit rates. The estimate for 2006 U.S. specialty drug spend was

$54 billion, which was 20% of overall prescription drug spending, with an increase to 26% — nearly $100

billion — by 2010. PBMs have been developing relationships with specialty pharmacies or have

developed their own specialty pharmacy operations in order to provide more comprehensive services to

clients and members. Specialty pharmacies dispenses high cost, low volume drugs that target specific

patient populations with chronic, potentially life threatening diseases such as HIV/AIDS, multiple

sclerosis, cystic fibrosis and cancer. These drugs typically require infusions or injections administered by

a health-care professional, and are very expensive ranging from $10,000 - $200,000 per year. Specialty

pharmacies contract directly with manufacturers to deliver products to patients, physicians, and

specialized clinics. In addition, they typically handle insurance billing and offer customer service, which

includes reimbursement counseling and 24-hour pharmacist assistance.

Specialty pharmacies use several strategies to address the challenging characteristics of specialty drugs.

These strategies include:

Availability of specialty medications and supplies for administration

Experienced and knowledgeable clinical-support teams

Patient-care coordination and compliance monitoring

Coordination of home-care services

Clinical pharmacy management of disease-specific programs

Pharmacy and medical benefit billing and reimbursement

Combined pharmacy and medical benefit specialty-drug utilization management

Formulary management support services

Most specialty drugs are used to treat chronic diseases that affect less than 3% of the general population.

Thus, the volume of specialty-drug use is relatively low when compared with the use of traditional drugs.

Additionally, many of the specialty drugs currently available are not available through open distribution

channels. Due to lowered treatment prevalence or limited supply of the drugs, pharmaceutical

manufacturers may control access to their specialty products by using specified distributors. These

distribution factors, combined with the typically high acquisition and inventory carrying costs associated

with specialty drugs, make specialty drug distribution impractical for traditional distribution channels such

as retail pharmacies.

Specialty pharmacies focus on the supply and distribution of specialty drugs; therefore, they have

immediate inventory of specialty drugs and the supplies needed for proper administration. Specialty-drug

distributors work with manufacturers and wholesale distribution channels to ensure continuous supplies

and to leverage volume, resulting in discounts that can be passed to clients.

Some of the Specialty Pharmacy Distribution services being offered by PBMs include:

Delivery of injectible biopharmaceutical products to patients‘ homes, physician offices,

Associated patient care services

Distribution of pharmaceuticals and medical supplies to providers and clinics

Third party logistics services for contracted pharma clients

Bio-pharma services including reimbursement and customized logistics solutions

Distribution of pharmaceuticals to low-income patients through pharmaceutical manufacturer-sponsored and company-sponsored generic patient assistance programs

Distribution of pharmaceuticals requiring special handling or packaging

Distribution of sample units to physicians and verification of practitioner licensure

Patient-Care Coordination

Patient-care coordination is the process that oversees multiple aspects of therapy for patients receiving

specialty drugs. Because specialty-drug treatment may change frequently, patient-care management

includes monitoring for:

Adequate home or office inventory levels of the drugs

Adherence to prescribed drug regimens

Continuity of care

Coordination of home-care services

Patient assessment screening surveys

Ongoing prior authorization requirements

Eligibility or benefits changes

Patient-care coordinators work in conjunction with licensed clinicians to provide comprehensive clinical-

management services. By providing patient-assessment screening surveys at each refill, patient-care

coordinators assist the clinical team in identifying high-risk patients and adverse clinical events at routine

intervals.

Specialty Pharmacists

Specialty drugs have unique handling and administration needs that require knowledgeable management.

Therefore, specialty pharmacies recruit healthcare professionals who have experience with the treatment

of patients using specialty drugs. Similar to physicians who require specific educational backgrounds to

specialize in the treatment of diseases such as hepatitis and multiple sclerosis (MS), healthcare

professionals who manage specialty drugs also require specialized, ongoing training to maintain high

levels of expertise. Standard training for pharmacists does not specifically address the handling

requirements of specialty drugs. Additionally, the majority of pharmacists do not encounter these drugs in

general practice. Specialty pharmacists, however, undergo extensive education in all aspects of specialty-

drug management.

Specialty Clinical Management

In addition to pharmacist specialization and training, specialty-drug management frequently extends

beyond the pharmacy and the physician‘s office, since patients will often require home-healthcare

services to support in-home injection training or ongoing infusion services. Therefore, specialty

pharmacies need to be able to provide coordination of nursing services in the home setting. Many times

the need for nursing care may be a one-time, education and training home visit — not a long-term need.

Separating drug delivery from nursing care often decreases costs by limiting higher-than-necessary levels

of care.

Clinical pharmacy oversight can often be provided by telephone, reducing the need for acute in-home

services. Thus, specialty pharmacies use a multidisciplinary team of experienced registered nurses and

social workers, in addition to trained pharmacists, to support the complex management requirements of

chronically ill patients receiving specialty medications. This team of licensed clinicians provides clinical

management, including the following interventions:

Medication self-administration oversight

Clinical assessment and patient monitoring • Disease state and medication education

Side-effect management

Physician consultation

Drug utilization evaluation and poly-pharmacy review

Therapeutic interchange and formulary management

Care coordination with other healthcare providers

Psychosocial support

Community resourcing

These services bring the added value of disease-management concepts to pharmacy, with critical

pathway management and targeted, proactive clinical interventions at specific intervals throughout

treatment to optimize clinical outcomes. Ongoing, objective measurement of clinical-outcomes indicators

specific to the disease and its treatment is paramount to quantifying the success of care-management

strategies. For example, in the treatment of rheumatoid arthritis (RA) with specialty medications such as

Enbrel® or Humira®, the key measurements of response to the treatment are improved joint mobility and

functional capacity, which can both be measured objectively at established intervals. By evaluating

clinical measurements, specialty pharmacies can document and provide treatment outcomes to clients.

A high rate of adherence with specialty-drug regimens is often critical to both short- and long-term

outcomes. For example, therapy adherence of greater than 80% is linked directly to positive treatment

outcomes for patients with hepatitis C. Specialty-pharmacy programs, such as patient-care management

and clinical oversight by experienced healthcare professionals, increase adherence rates among

specialty pharmacy patients when compared with patients receiving drugs from other distribution

channels.

Billing, Reimbursement and Data Management for Specialty Drugs

Coverage for specialty drugs may be provided under the medical benefit, the prescription-drug benefit or

both. Due to these complex coverage issues, specialty pharmacies must be prepared to manage multiple

types of billing and reimbursement, ranging from electronic adjudication using the National Council for

Prescription Drug Programs (NCPDP) format to more traditional paper claims. The higher cost of

specialty drugs leads to other billing-related issues that include coordination of benefits and prior

authorization requirements. To be successful, specialty pharmacies must also support these additional

reimbursement needs.

Due to the long duration and high cost of therapy generally required to treat chronic disorders, the

availability of adequate health insurance is a continual concern for chronically ill patients. Generally, the

payor, such as an insurance provider under a medical benefit, is contacted prior to each shipment to

determine the patient‘s health plan coverage and the portion of costs that the payor will reimburse.

Reimbursement specialists review matters such as preauthorization or other prior approval requirements,

lifetime limits, pre-existing condition clauses, and the availability of special state programs. By identifying

coverage limitations as part of an initial consultation, PBMs assist the patient in planning for alternate

coverage, if necessary. From time to time, PBMs negotiate with payors to facilitate or expand coverage

for the chronic diseases served. In addition, PBMs accept assignment of benefits from numerous payors,

which substantially eliminates the claims submission process for most patients. Historically, drugs were

primarily reimbursed by the patient‘s health insurance plan through a medical benefit. This has evolved

where, based on the type of drug dispensed, an increasing percentage of transactions are reimbursed

through a prescription card benefit, which typically results in accelerated reimbursement. Combined

prescription- and medical-benefit billing requirements in a specialty-pharmacy setting also create unique

opportunities for comprehensive specialty-utilization management. Working with client sponsors, specialty

pharmacies have designed programs that supervise appropriate utilization of specialty drugs and ensure

medical necessity of ongoing treatment, regardless of benefit coverage.

For example, to manage the treatment of RA, clients need to consider all of the specialty RA drugs.

Although most self-injected specialty drugs for RA (Humira®, Enbrel® and Kineret®) usually are currently

covered as a prescription-drug benefit, another specialty drug used to treat RA, Remicade®, an infused

agent, is more likely to be covered under medical benefits. Requiring prior authorization on the

prescription-drug benefit side could increase the use of these drugs on the medical benefit side if medical

benefits are not also managed. By distributing all four products through a specialty pharmacy, however,

the client can evaluate all the specialty-drug treatments for appropriateness prospectively — regardless of

benefit coverage — not only when they are started, but also periodically during therapy.

Formulary Development and Management for Specialty Drugs

With the multifaceted benefit structure and the clinical complexity of managing step therapy, specialty

pharmacies with their expertise and delivery model can support clients to drive performance and cost

savings to client formulary offerings. More specialty drugs are entering the market with multiple

indications. Additionally, some therapy classes now include several specialty drugs. Both factors allow for

development of formularies for certain specialty disease states and drugs.

Specialty pharmacies are positioned not only to provide formulary administrative and consultative

services, but also to align the payer‘s cost-containment objectives with optimal therapy. Formulary

management for specialty drugs, similar to traditional oral medications, requires management oversight to

maximize penetration and performance from the formulary offering. In analyzing all the services required

to manage specialty drugs and the required services provided by specialty pharmacies to meet this need,

it is evident that not all distribution channels are set up operationally to handle the unique challenges of

specialty drugs‘ inherent service requirements.

Medication Therapy Management

Medication Therapy Management (MTM) is an emerging service that is approached from various

perspectives and fulfills multiple needs in the marketplace. MTM programs focusing on medication

therapy problems show improved clinical and financial outcomes. Disease Management and MTM

contribute to various pieces to the healthcare puzzle. These services provide synergies that otherwise

would not be realized with the same impact if applied separately. When DM, case management and MTM

are adopted separately, they create misalignment for payers and confusion for patients. Technology plays

an integral role in the success of MTM. The future of Healthcare becomes brighter as MTM becomes

commonplace. The healthcare synergies created by adoption of collaborative care continue to drive

positive clinical, economic and humanistic outcomes for all involved.

Definition

Eleven national pharmacy organizations created a definition for MTM services, and defined MTM as

follows:

Medication Therapy Management is a distinct service or group of services that optimize therapeutic

outcomes for individual patients. Medication Therapy Management Services are independent of, but can

occur in conjunction with, the provision of a medication product.

Medication Therapy Management encompasses a broad range of professional activities and

responsibilities within the qualified Healthcare provider‘s scope of practice. These services include but are

not limited to the following, according to the individual needs of the patient:

a. Performing or obtaining necessary assessments of the patient‘s health status.

b. Formulating a medication treatment plan;

c. Selecting, initiating, modifying , or administering medication therapy;

d. Performing a comprehensive medication review to identify, resolve, and prevent medication-

related problems, including adverse drug events

e. Documenting the care delivered and communicating essential information to the patient‘s other

primary care providers;

f. Providing verbal education and training designed to enhance patient understanding and

appropriate use of his/her medications;

g. Providing information, support services, and resources designed to enhance patient adherence

with his/her therapeutic regimens;

h. Coordinating and integrating medication therapy management services within the broader

healthcare-management services being provided to the patient.

The 2003 Medicare Modernization Act (MMA) mandates all Medicare Part D plan sponsors to offer MTM

services to beneficiaries who meet threshold requirements. Eligible patients in this program must:

Have multiple chronic diseases (number of diseases quantified by the plan sponsor)

Have multiple covered Part D medications (number of medications quantified by the plan

sponsor)

Incur annual costs for Part D medications exceeding a specified level decided by the Secretary of

Health and Human Services

Medication Therapy Management Services

The American Pharmacists Association and the National Association of Chain Drug Stores Foundation

developed a MTM Core Elements Service Model, which includes a workflow diagram depicting how the

patient care process integrates with MTM service delivery. The overall goal is to include the pharmacist

throughout the process of medication management and engage patients in self-managing their

medications. In the model, the medication therapy review is followed by an intervention and/or referral to

an appropriate team member. The patient is empowered by being provided with ―Collateral‖ that includes

a personal medication record and a medication-related action plan, which the pharmacist then used to

document and communicate any future activity, including communication with others involved with the

patient‘s care.

There are variations in delivering the service model but the core elements remain the same. The dynamic

components are twofold: active involvement of the patient and the ability to collaborate with other

healthcare providers who interact with the patient. As you can see in the center of the above figure,

referrals, interventions, and collaboration with providers take place within the model. Overall, the goal is

to effectively integrate MTM services into patients‘ overall health care by facilitating transitions of care to

ensure a seamless process.

MTM services are made available to patients from both private and public sector payors, including self-

insured employers, state Medicaid programs, and Medicare. Because MTM services are required for

targeted beneficiaries in the Medicare Part-D benefit, the evolution of MTM under Part D is being followed

closely. To date, MTM program providers have used various delivery methods, including face-to-face

visits, telephonic interventions, and educational mailings, or a combination of those methods.

Case Study

Health Net Medication Therapy Management Program Helps Chronically Ill Medicare Members

Improve Prescription Drug Use

About Health Net

Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission

is to help people be healthy, secure and comfortable. The company's health plans and government

contracts subsidiaries provide health benefits to approximately 6.7 million individuals across the country

through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net's

behavioral health subsidiary, MHN, provides mental health benefits to approximately 6.9 million

individuals in all 50 states. The company's subsidiaries also offer managed health care products related

to prescription drugs, and offer managed health care product coordination for multi-region employers and

administrative services for medical groups and self-funded benefits programs.

Health Net Pharmaceutical Services (HNPS), the pharmacy benefit management subsidiary of Health

Net, Inc., in March 2009 released the results of a study showing that its Medication Therapy Management

(MTM) Program in 2008 reached 90 percent of Health Net‘s eligible Medicare Part D members. According

to the Centers for Medicare and Medicaid Services (CMS), the national participation rate in similar free,

voluntary MTM programs was 65 percent. As a result of the program‘s success, CMS recently selected

Health Net as one of only 10 Medicare Part D sponsors to participate in a pilot program to perform in-

depth analysis on MTM outcomes. Health Net‘s innovative program helps its Medicare Part D members

who have multiple chronic diseases and multiple chronic medication prescriptions to improve how they

take their drugs and potentially decrease their pharmacy expenses.

In 2008, Health Net enrolled approximately 90,000 members in its program. Of the more than 162,000

drug related problems (DRPs) identified, the pharmacists intervened in approximately 50,000 to increase

taking medication regularly, 45,000 to explain potentially adverse drug interactions, 44,000 to reduce cost

of care, 20,000 to fill gaps in care with their doctor, and 3,000 to stop duplicate drug therapy.

―Our program provides a comprehensive approach for effective and safe medication treatments that lead

to positive medical outcomes and economic value for our members,‖ said Virginia E. White, Pharm.D.

FCSHP, senior vice president and chief clinical officer of HNPS. ―It presents an entire picture of a

patient‘s health because we not only involve the member but the many individuals who may help them –

their caregivers, physicians and pharmacists as well as our pharmacists and care coordinators.‖

HNPS MTM Program Overview

HNPS pharmacists review up to 5,000 member profiles weekly for potential Drug Related Problems

(DRPs) including noncompliance, gaps in therapy, drug interactions, and contraindications, as well as

opportunities to reduce members‘ out-of-pocket costs by taking generics or formulary alternatives to treat

their cholesterol, blood pressure, diabetes, allergies, acid reflux, and other ailments. The pharmacists

send letters with this information to encourage members to call HNPS and speak with one of its MTM

pharmacists, and to bring the letters to their next doctor appointment. The pharmacists also discuss the

DRPs with their colleagues at Managed Health Network (MHN), Health Net‘s behavioral health subsidiary,

for potential psychosocial intervention. Serving as ―health coaches,‖ the pharmacy and behavioral health

clinicians talk with members about MTM and mental health services available to them. These issues

range from addressing mental health concerns to physician searches, adult day care, weight loss, and

smoking cessation.

HNPS chose to go beyond the minimum CMS guidelines to help provide the peace of mind to more

members that they are safely taking the right prescription drugs for their medical conditions. In addition to

integrating MHN‘s behavioral health services into the program, HNPS chose to widen eligibility criteria to

members with three or more diseases who take five or more drugs, and changed from opt-in to opt-out

membership to extend services to more members. HNPS pharmacists also built an internal, web-based

software application to review members‘ drug history profiles, maintain records and generate

communications. The application‘s ease of use, accuracy and efficiency has enabled HNPS to offer

services beyond minimum CMS requirements.

CMS requires all insurers offering Part D plans to also offer a free and voluntary MTM program to their

eligible members who have multiple chronic diseases, take multiple drugs and are likely to incur at least

$4,000 in annual pharmacy costs. Since 2006, HNPS has collaborated with QIOs representing 12 states

and the District of Columbia, sharing its pharmacy claims data to help them ensure effective and safe

medication treatments for the elderly.

4. Overview of PBM Financials and Pricing

PBM‘s derive revenue from clients, manufacturers, and in some cases pharmacies, while administering

the financials and pricing of drug benefits.

In general:

Clients are charged an administrative fee for services like claims processing. PBMs may also

charge a small transaction fee for claims processing to the pharmacies participating in their

network.

PBMs reimburse dispensing pharmacies for the ingredient cost plus dispensing fees less co-pay

for drugs dispensed to members, and then pass this cost on to clients.

PBMs receive rebates and administration fees from manufacturers. PBMs typically retain the

administrative fee, and share the rebates with their clients.

PBMs may receive additional money from manufacturers for the sale of data, maintaining clinical

programs, or other services. Clients may be charged for clinical management programs, or other

―custom‖ services such as ad-hoc reporting or providing dedicated customer service teams.

PBMs may also make a small profit from their mail pharmacy operations. One of the primary

reasons clients retain PBMs, is that PBMs reduce the cost of offering a pharmacy benefit. PBMs

do this by automating administrative services, obtaining discounts on drugs (ingredient cost), and

managing drug utilization. As shown in the table below, the average prescription costs $59.17 in

an unmanaged market (e.g., fee for service). Through a PBM this cost is reduced to $38.96, or

34% less than the fee for service cost.

Table - FFS versus PBM Cost Savings

1. Based on internal documents for an actual client.

2. AWP (Average Wholesale Price) estimated at $54.79

3. FFS cost estimated at AWP + 8%.

4. AWP is a blended number based on a 65/35 brand to generic ratio.

5. Retail discount is a blended number based on a 65/35 brand to generic ratio. The average branded

retail discount was assumed at 14% off AWP, and the average generic retail discount assumed at 50%

off AWP. Retail discount assumed at 27%.

6. Ingredient cost equals AWP less average retail discount (27%)

7. PBM cost per prescription is net of total rebates/savings per claim.

4.1 Contract based pricing

The flow of money and pricing between PBMs and their business partners varies according to the type of

contract. There are three types of contracts PBMs hold with their clients: fee-for-service, shared savings,

and capitated.

Fee-For-Service Contracts

Fee-for-service contracts are the most common pricing arrangements PBMs have with their clients. Under

these contracts, PBMs are paid for the administrative services they provide (claims processing). The PBM

retains the manufacturer-paid administrative fees and, depending on the client, some percentage of the

rebates. With this type of contract, the PBM does not assume risk for the cost of drugs dispensed

(ingredient cost); this cost is passed through to the clients. PBMs contract with their clients and pharmacy

network for retail pricing for branded and generic drugs, for drugs dispensed from a mail pharmacy, and

in some cases, specialty pharmacies. Pharmacists are reimbursed the discounted ingredient cost, plus a

dispensing fee. Ingredient cost is typically the lower of average wholesale price (branded), maximum

allowable cost (generic), or usual and customary (price-charged cash-paying customers). The member

also pays pharmacists co-pay.

Certain PBMs guarantee clients an overall price (e.g., AWP – 12% + $2.50 dispensing fee), and then

manage the pharmacy network based on negotiated prices, which on average are comparable to the

prices guaranteed to clients. In some cases, the PBMs may generate a small profit off their network

pricing. PBMs receive claims processing fees from clients on a per transaction basis for a bundled

package of services that typically includes: basic administrative and clinical services, such as claims

adjudication, drug utilization review (DUR), member communications, member ID cards, provider

directories, standard reports, fraud protection, and on-site claim audits. PBMs may also charge separate

administrative fees for additional services not included in the bundled package such as prior

authorization, disease management, and customized reports. These additional services are paid either on

a per transaction basis or as a quarterly/monthly flat fee.

Risk Sharing (Shared Savings) Contracts

PBMs also maintain shared savings arrangements with clients. An effective way to manage pharmacy

cost is through a shared savings arrangement, where the client and the PBM share the savings. These

arrangements provide incentives for both sides to collaborate and run the pharmacy benefit program

effectively. Under these arrangements, PBMs guarantee clients minimum rebates, generic prescription

dispensing rates, and discounts from average wholesale prices. Failure to meet these targets triggers

financial penalties for the PBM. In return, PBMs expect clients to sign long term contracts in order to

realize potential reductions in utilization and costs. Under shared savings contracts, the flow of revenue

and drug pricing is similar to fee-for-service contracts. However, PBMs will reconcile on a

quarterly/monthly basis any drug costs savings with the client.

Capitated Contracts

Capitated pricing, tested by the PBM industry in the early-1990s, is essentially nonexistent today since

PBMs generally lost money through these arrangements.

In a capitated pricing arrangement, the PBM agrees to assume financial risk for a client‘s drug spending.

Capitation is a set dollar amount, established by analysis of pharmacy claim data, used to cover the

prescription costs for a member. The amount is usually a per member, per month (PMPM) rate; the client

is responsible for monthly payments to the PBM. With this type of contract, the PBM functions in a

capacity similar to that of an insurer. As a result, PBMs assuming risk are required to have an insurance

license. Under a capitated arrangement, the PBM receives a PMPM payment from the client. This

payment (or premium) is expected to cover the PBM‘s cost of providing pharmacy benefits to the client‘s

members, as well as the administrative and clinical services provided by the PBM. If the PBM is able to

effectively control utilization and spends less than the PMPM payment (plus any overhead allocation),

then it enjoys the profits. However, PBMs that manage large volumes of patients with catastrophic

illnesses may, in fact, lose money.

This type of contract is risky, given unpredictable factors such as the release of new branded drugs,

escalating drug prices, direct-to-client (DTC) advertising and higher prescription utilization rates. In

addition, PBMs do not have risk arrangements with physicians; nor can they benefit from the tradeoff of

drugs versus medical costs. PBMs have only indirect influence on drug volume, such as physician

interventions or through increases to member co-pays. Also, pharmaceutical manufacturers have not

been willing to underwrite the risk of PBM‘s that enter capitated arrangements.

4.2 Pricing

The three main services provided by PBMs to its clients are:

Transaction processing, including managing the eligibility files, benefit information and payment

transactions connected with an Rx.

Network and formulary management, such as negotiating with both pharmaceutical companies

and pharmacies over pricing, and ensuring that the most cost-effective drugs and most

appropriate therapies are available to the member. This includes techniques such as generic

substitution, pre-approval, step therapy and compliance programs--all of which tend to add

administrative complexity to the current prescribing infrastructure.

Mail-order pharmacies, which typically supply lower-cost 90 day supplies of chronic medications

to the member

PBM‘s derive the majority of their revenue from clients and manufacturers. PBMs typically receive an

administrative fee -- on a per-claims basis -- from their clients that covers the majority of services they

provide. In addition, the PBM retains the administrative fees paid by manufacturers and a portion of the

rebates. PBMs pass the cost of the drug benefit to their clients. PBMs may also have a shared savings

arrangement with clients, where the client and the PBM share the savings. These arrangements provide

incentives for both sides to collaborate and run the pharmacy benefit program effectively.

Administrative Fees (Claims Processing)

PBMs charge their clients an administrative fee based on the number of claims processed. Client

administrative fees are approximately $0.30 - $0.40 per processed claim. This fee typically covers the

PBM‘s administrative services, as well as basic clinical services like formulary management, therapeutic

substitution, and utilization management. PBMs may charge additional fees for dedicated client or

member service teams, ad-hoc reporting, special clinical programs (e.g. disease management, prior

authorization, etc.) customized educational material, or other services. Major insurers or HMOs that have

outsourced their drug benefit to a PBM typically charge their clients for PBM services on a per member

per month (PMPM) basis, and may list the PBM services as a separate charge or combined with their

medical administrative charge. Major insurers or HMOs do not sell PBM services as a stand-alone

product.

Pharmacy Reimbursement and the Cost of Pharmaceuticals

Pharmacies are reimbursed by the PBMs (as a pass through from clients) for the ingredient cost of the

drug dispensed plus a dispensing fee, less the member‘s co-pay or co-insurance. Ingredient cost is based

on the lowest of three calculations, depending on the drug dispensed: AWP, maximum allowable cost

(MAC), or usual and customary (U&C). Reimbursement rates vary depending on the network. Ingredient

cost for branded drugs under patent is typically reimbursed at AWP minus a discount percent (usually 12–

15%). AWP for all pharmaceuticals is calculated and maintained by the third party data vendor

Medispan/First Databank. Dispensing fees for branded drugs are typically $2.00–$3.00 per prescription.

Ingredient costs for generic drugs are commonly based on MAC pricing typically 50–60% below AWP.

MAC prices are typically set at the regional or Metropolitan Statistical Area (MSA) level to reflect

variations in cost of living across the country. PBMs can either set the MAC prices themselves, or use the

MAC prices set by HCFA for Medicaid beneficiaries. PBM-set MAC prices are usually higher than those

set by HCFA to encourage pharmacies to participate in their network. Compared to the HCFA MAC, the

PBM MAC also covers more drugs and is updated more frequently. Some PBMs offer higher dispensing

fees for generics to encourage the pharmacist to substitute a generic equivalent for a branded drug.

Dispensing fees for generics are typically $2.00–$3.00 per prescription.

To ensure their clients receive the lowest possible price for drugs, pharmacies are contractually obligated

to limit their reimbursement to the price they would charge a cash-paying customer. This price is called

usual and customary (U&C), and is determined by the pharmacy. For example, if a retail pharmacy

charges a cash-paying customer $20 for a drug, the retail pharmacy cannot invoice the PBM for an

ingredient cost greater than $20, regardless of the AWP discount or MAC price in effect for that drug. For

example, the member has its prescription filled for Drug ABC at a retail pharmacy, and pays the required

$10.00 co-pay. The pharmacy is then reimbursed $14.25 for the ingredient cost (AWP – discount) of the

drug plus the dispensing fee, less the co-pay [AWP ($25) – 13% + a dispensing fee ($2.50) –co-pay

($10)].

For generic drugs, the member pays $5.00 co-pay to the retail pharmacy. Given that the MAC price for

this drug is set at $6.00, the retail pharmacy is reimbursed $4.00 [MAC ($6.00) + dispensing fee ($3.00) –

co-pay ($5.00)].

Pharmacies do not typically receive discounted pricing (or rebates) on branded drugs. In some cases,

generic manufacturers will provide pricing incentives to pharmacies based on volume, market share, or

exclusivity. Retail acquisition cost for branded drugs is typically 20%-25% below average wholesale price

(AWP), which is the wholesalers mark-up from WAC (wholesale acquisition cost). In some cases, retail

chain distribution centers may pay WAC.

Medicaid Dispensing Fees

Dispensing fees are fees that are part of the overall formula for prescription reimbursement and are paid

to the pharmacy for the act of performing administrative tasks related to the processing and filling of a

prescription. For example, a typical Medicaid reimbursement formula would be as follows:

Drug Ingredient Fee + Dispensing Fee – Patient Copayment = Total Prescription Reimbursement

These dispensing fees encompass a wide range from approximately $0.50 to $2.00 in a Medicaid

managed care plan, or $1.75 or $11.46 per prescription in a traditional Medicaid fee-for-service plan.

Each state sets the Medicaid fee-for-service dispensing fee under state administrative law; however, each

participating state managed care plan is not bound by state law and can set the fees at any level. All

participating pharmacies must accept that managed care rate of reimbursement even if it is significantly

lower than the Medicaid Fee-for-Service rates.

Rebate Administration and Payment

The rebate is a payment from a pharmaceutical company to a PBM for driving more volume to its

branded product by putting it higher on formulary

PBMs contract with the manufacturers of branded drugs to receive rebates and administrative fees.

Rebates are usually shared with clients; administrative fees are retained by the PBM. Manufacturers pay

administrative fees to PBMs for administering formulary rebate contracts. These fees range from 1% - 3%

of WAC (WAC is the cost to the wholesaler for buying the drug from the manufacturer and is typically

used as the reference price for calculating rebates and administration fees). Typically, manufacturers pay

rebates and administrative fees for all contracted products dispensed to qualified members. The amount

of rebate shared with the client is a negotiable point and can range from 100% for very large clients to

zero for small clients.

For example, the WAC for a drug ABC is $20. After all claims for drug ABC have been submitted by the

pharmacy for reimbursement for an entire month or quarter, the PBM submits a claim to the manufacturer

for payment. For the current period and assuming an incented formulary, the PBM achieved 20% market

share, which makes them eligible for a 10% rebate in addition to the 2% (say) administrative fee for all

prescriptions processed by the PBM.

Typically, manufacturers pay higher rebates when the market share of a drug exceeds the market share

in the unmanaged market (e.g. national market share). In some cases, manufacturers rebate differently

depending on the client‘s degree of control over pharmacy benefit. For example, closed formulary clients

might receive better rebates than open formulary clients for the same market share. PBMs typically pass

rebates through to their clients and retain 100% of administrative fees. Continuing with the previous

example, the PBM received a $2.00 rebate and a $0.40 administrative fee for each prescription from the

manufacturer. The PBM‘s contract with their clients stipulates that the PBM will pass through 80% of the

rebates to the client. In some cases, PBMs may guarantee their clients a rebate/claim.

Overall, the PBMs receive access rebates and market-share rebates, but the proportion of each type

varies with each pharmaceutical manufacturer arrangement. The majority of both the access and the

market-share rebates are shared with clients. They also earn administrative fees from pharmaceutical

manufacturers for services rendered in connection with rebate agreements. The revenue types and their

description are explained in the table below:

Revenue Type Description Who Gets It

Access rebates from

pharmaceutical manufacturers

Rebate amount is negotiated

depending on formulary

placement of the applicable drug,

and competing drugs in its class.

PBM gets the money and passes

it on to clients.

Market share rebates from

pharmaceutical manufacturers.

Rebate amount depends on the

demonstrated impact of the

PBM‘s programs on particular

brands.

PBM gets the money and passes

it on to clients.

Administrative fees from

pharmaceutical manufacturers

Service fees for administrative

tasks such as aggregating

members, performing market

share analysis used to calculate

rebates, and consolidating billing

to clients. These fees are

contracted for independently with

each manufacturer.

PBM gets the money and keeps

it.

Fixed rebate per Rx Fixed amount per filled

prescription paid by the PBM to

an employer client. Allows rebate

amount to be figured out by

number of prescriptions

Employer clients get this money

from PBMs.

It is estimated that administrative fees represent about 1% of the total drug spend of the year. PBMs may

differ in the way they charge their clients:

1. Some of the PBMs treat rebates from pharmaceutical companies as the property of its clients,

meaning they belong to the plan sponsor (e.g., managed care organization or employer group).

They account for the portion (which can range from 0%-50%, but less than 20% in total) of the

rebate that it keeps as revenue.

2. Some PBMs offer its customers a fixed rebate per branded script. This offers the client a fixed

cost and PBM a nice profit. In accounting for rebates, they count the total rebate amount in total

gross revenues, and then take a reduction to total gross revenues for the amount of the rebate

that is passed on to customers. The entire rebate amount is an offset to cost of goods sold. As

long as the accounting procedures are understood, this method provides more information to

observers and analysts than does the previous method.

3. In some cases, PBM receives market-share rebates from manufacturers, and also uses a

proprietary "bid grid" that allows manufacturers to bid on the rebates they will provide to the

PBM's clients. This system allows the rebate to reflect the exact placement of a drug (and its

competitors) on the client's formulary. This allows clients to adjust their formularies and co-pay

structure for maximum rebates, while balancing the particular demands of their membership or

employees. Once the rebate is negotiated, they guarantee clients a fixed rebate per prescription.

5. PBM Relationships

Relationships that a PBM Must Establish to Manage Pharmacy Benefits

A PBM must establish a network of retail pharmacies so that consumers with prescription drug insurance

can fill their prescriptions without traveling long distances. Often, retail pharmacies compete to be part of

the retail pharmacy network for a particular PBM. In addition, PBMs may contract with pharmaceutical

manufacturers to obtain various payments as compensation for managing the dispensing of the

manufacturer‘s drug product. Pharmaceutical manufacturers compete to ensure that their products are

included on the list of authorized drugs managed by the PBM (the ―formulary‖). PBMs then package these

services together to offer a pharmacy management product to their clients - plan sponsors. Indeed, some

call PBMs the ―middlemen‖ among plan sponsors, pharmaceutical manufacturers, and retail and mail-

order pharmacies.

5.1 PBM Relationships with Retail and Mail Pharmacies

Retail pharmacies are on the front line of providing health care services to consumers when the

pharmacist fills the consumer‘s drug prescriptions. Because of the variety of drugs that consumers may

request at any given time, retail pharmacies must stock a wide range of brand and generic drugs. They

purchase these drug products directly from pharmaceutical manufacturers or from drug wholesalers. The

arrows in Figure 1 show the dollar flows between retail pharmacies and drug manufacturers/ wholesalers.

Figure -1

PBMs must establish networks of retail pharmacies that will fill prescriptions for the plan sponsors‘

members. Most PBMs contract with 90% to 95% of the retail pharmacies in the regions they serve. Retail

pharmacies receive revenue from two sources for filling PBM administered prescriptions: (a) the

consumer (copayment or coinsurance amount); and (b) the PBM (reimbursement of the dispensed drug‘s

ingredient cost plus any dispensing fee associated with filling the prescription, less the copayment). To

become part of a PBM‘s network, retail pharmacies often compete over the discounts they will offer to

PBMs on the reimbursement amounts for ingredient costs and dispensing fees for prescriptions that they

fill.

The price at which the PBM will reimburse a retail pharmacy for a given drug is stated as a discount from

a measure of list price plus a dispensing fee for the pharmacy. For brand drugs, the ―average wholesale

price‖ (AWP) as stated by the wholesaler or manufacturer is used as a basis for the discount. AWP is not

the actual price that wholesalers or pharmaceutical manufacturers charge or the amount retail

pharmacies pay to acquire drugs; rather it is more like a sticker price in the automobile industry. For

example, the price formula might be ―AWP minus 12% of AWP plus $2.00.‖ For generic drugs, the

discount is even greater than for brand drugs, e.g., ―AWP minus 50% of AWP plus $2.00.‖ Instead of

using the AWP for generic drugs, some PBMs use a ―maximum allowable cost‖ (MAC) to reimburse the

retail pharmacy. MAC prices for generically equivalent drugs are based on the AWPs of competing

generic drug manufacturers. The federal government issues a MAC price schedule (the ―Federal Upper

Limit‖ (FUL)) for generic products that have three or more manufacturers or distributors. Some PBMs

utilize the FUL schedule, while others calculate a maximum allowable cost based on their own formulae,

which utilize the AWPs of competing generic drug manufacturers. Each PBM can have its own MAC list

and some even maintain more than one MAC list. Retail pharmacies may compete over the discounts

from the reference price (AWP or MAC) they will offer a PBM depending on the type of plan sponsors and

the number of members covered by the PBM. Retail pharmacies generally will offer higher discounts to

be in a more exclusive network, because each retail pharmacy will fill a larger percentage of prescriptions

if fewer retail pharmacies are in the PBM‘s network. A PBM may have several networks, which differ in

their exclusivity, that it offers its clients. The bold arrows in Figure 2 show the dollar flows between the

PBM, the retail pharmacy, and a plan member. The lighter arrows show the relationships between the

retail pharmacy, drug wholesaler, and pharmaceutical manufacturers already shown in Figure 1.

Figure 2

In addition to including retail pharmacies in their pharmacy networks, most PBMs also offer mail-order

pharmacy services. The three large independent PBMs (Caremark, Express Scripts and Medco Health)

own the mail pharmacies they use to serve their plan sponsor clients Small or insurer-owned PBMs and

retailer-owned PBMs either own mail pharmacies or contract with other mail-order pharmacies owned by

another PBM or retail pharmacy. Some PBMs have used a competitive bidding process to choose the

mail-order pharmacy they will use to serve their clients. The bold arrows in Figure 3 show the dollar flows

between PBMs, members, and mail-order pharmacies not owned by the PBM, as well as dollar flows

between mail pharmacies and drug wholesalers/pharmaceutical manufacturers.

Figure 3

Figure 3 shows that retail and mail-order pharmacies are often competitors, because both seek to fill the

prescriptions of plan sponsors‘ members.

5.2 PBM Relationships with Pharmaceutical Manufacturers

PBMs also establish relationships with Pharmaceutical manufacturers, who compete to have their drugs

placed on a PBM‘s formulary. A formulary is a list of approved or preferred drugs for the plan. Prescription

drugs that are ―on formulary‖ often have lower member copayment amounts, thereby providing incentives

to members to seek prescription drugs that are ―on formulary‖ to lower their out-of-pocket costs. Thus,

formulary status can drive the sales of manufacturer‘s drug products.

Formulary compliance is the extent to which members use drugs on the formulary. The level of formulary

compliance demonstrates the ability of the PBM to steer enrollees to drugs on the formulary. PBMs strive

for high formulary compliance, because high compliance enables a PBM to show the manufacturers that

the PBM can induce use of formulary products and increase their products‘ market shares.

Most PBMs contract with Pharmaceutical Manufacturers for payments that are based on the formulary or

on the particular drug‘s share of the drug products sold to a plan‘s members. Pharmaceutical

manufacturers use ―formulary payments‖ to obtain formulary status, and/or they use ―market-share

payments‖ to encourage PBMs to dispense their drugs, especially in crowded therapeutic classes in

which there are many similar drugs. Both payments are often specified as a percentage of the drug‘s

wholesale price (e.g., a percentage level of 10% means the manufacturer will pay the PBM 10% of a

measure of the drug‘s wholesale price multiplied by the quantity dispensed). PBMs receive payments

from pharmaceutical manufacturers even though PBMs do not take physical possession of drug products

that are dispensed through retail pharmacies. Industry participants generally refer to these payments as

―rebates.‖ This report will use the term ―pharmaceutical payment,‖ rather than the term ―rebate,‖ because

pharmaceutical manufacturers make these payments to PBMs and not to the entity that actually

purchased the drug.

PBMs‘ contracts with pharmaceutical manufacturers also may provide for administration fees, data

sharing fees, and promotional programs under which the PBM can earn additional revenues. PBMs are

often the central repository of claims data that can be used for studying utilization trends, prescribing

patterns, and outcomes. Some PBMs sell this aggregated, non-identifiable data, or studies based on the

data, to pharmaceutical manufacturers. The bold arrow in Figure 4 shows the dollar flows between the

manufacturer and the PBM.

Figure 4

5.3 PBM Relationships with Plan Sponsors

PBMs contract with plan sponsors to provide pharmacy benefit management services to their members.

Plans, often with the help of consultants, issue requests for proposals (RFPs) to several PBMs and then

evaluate the proposals based on costs and the package of services offered by each bidder. Insurer-

owned PBMs often compete for these contracts in addition to offering PBM services to their health plan

members. The RFPs vary depending upon the attributes of the prescription drug insurance coverage that

the plans want to provide to their members. For example, some plans may not require members to make

copayments for drugs dispensed by network pharmacies, while others may require varying copayments

depending on whether the drug is a generic, a brand, or an off formulary drug and whether it is purchased

at a network retail pharmacy, mail-order pharmacy, or out-of-network pharmacy. Plans also consider

other factors, including generic dispensing rates, the range of prescription drug choices available to their

members, and the price of dispensing fees, drug ingredient costs, and member copayments. In all, plans

seek to match PBM services to best meet their objectives in offering pharmacy benefit insurance

coverage. PBMs compete on price and non-price dimensions to serve these varying client needs. One

survey of plan sponsors using PBM services showed that the financial terms of the bid (such as the

reimbursement rate and dispensing fee paid to pharmacies, the manufacturers‘ payments to plan

sponsors based on formulary drugs utilized, mail-order pricing, and administrative fees) often were the

key determinants in the selection of the winning bid. This survey also found that plan sponsors were

concerned about non-price dimensions of service, such as benefit design, the extent of the retail network,

and the quality of mail-order service. The Commission collected data on the amounts that PBMs pay to

the plan sponsor to help defray the costs of switching to the PBM at the start of a new contract or bonus

amounts to obtain or retain the plan sponsor as a customer.29 The data revealed that large PBMs and

retailer-owned PBMs often make these payments, but they usually do not total more than $100,000 per

client. There were exceptions. In 2002 and 2003, some PBMs made payments to plan sponsors that

ranged between $1.5 and $20 million per client.

The Commission staff‘s review of PBM contracts with plan sponsors suggested that member satisfaction,

dispensing accuracy rates, turn-around time at mail pharmacies, wait time for customer service calls,

distance to a network retail pharmacy, and timeliness of management reports are also key factors in any

contract.30 Most PBM-plan sponsor contracts included performance guarantees (e.g., prescription fill

time, call center response time, and generic substitution rates) that required the PBM to make specified

dollar payments to the plan sponsor if the PBM failed to meet the guarantees. PBMs often work with plan

sponsors to create plan designs with copayments, coinsurance, or deductibles that provide members with

incentives to comply with a plan=s formulary. Those incentives range from differential copayments to

complete denial of coverage for out-of-network or off-formulary purchases. Plan sponsors and PBMs also

may negotiate over incentives for enrollees to use mail-order pharmacies for maintenance medications.

The PBM‘s contract with a plan sponsor covers the amount that the plan sponsor will pay to the PBM for

each prescription dispensed at a network retail pharmacy. The PBM‘s charge to the plan sponsor per

prescription is similar in form to the retail pharmacy contract. For brand drugs, it is a discount off AWP

plus a dispensing fee and an administrative charge per script, e.g., ―AWP minus 10% plus $1.50 plus

$0.10.‖ For generic drugs, the charge is similarly calculated, but the discount is usually off of the price

specified on the PBM‘s MAC list.34 Some PBMs earn revenues and profits through the ―spread‖ between

the amount charged to a plan sponsor and the amount paid for the drug product, including a dispensing

fee if any, to the retail or mail-order pharmacy that dispenses the drug product to the plan member. The

bold arrows in Figure I-5 show the dollar flows between plan sponsors, PBMs, and members.

Figure 5

Plans may contract for other PBM services. Retrospective drug utilization reviews (DURs) analyze

physician prescribing patterns to identify physicians who prescribe high cost drugs when lower cost

alternatives are available. Concurrent DURs check for drug interactions to minimize adverse reactions,

early or late refills, or duplicate therapies. Clinical pharmacy management or disease management offers

treatment information to, and monitoring of, patients with certain chronic diseases. One insurer-owned

PBM noted that it charges a plan sponsor approximately $1.00 per member per month for such programs

and guarantees the plan sponsor $2.00 in drug-spend savings per member per month. The actual

savings are averaging $3.00 per member per month. This PBM believes clinical pharmacy management

programs will be a significant revenue source for PBMs in the future.

5.4 PBM Ownership Models

PBMs can either be independently owned and operated or can be owned by other entities such as

Managed care Organizations, Retail pharmacy giants, etc. PBM Ownership should be aligned around

maximizing the value of the PBM to its client health plans and the health plans' members and be cost

effective in generating revenues

Classification of PBM Ownership Models

PBMs can be classified into two broad categories:

(1) Full service PBMs – PBMs that own and operate all services they provide to customers.

(2) Non-full service PBMs – PBMs that may own and operate part of the services they provide to

customers, and contract outside vendors for other services.

Let us see some of these ownership models with the following examples.

Some Independent PBMs present in the market today are Catalyst RX, Innoviant, Medco, MedImpact,

and PerformRX. Others are owned by managed care organizations such as Aetna Inc., CIGNA

Corporation, First Health, Humana Inc., Prime Therapeutics and Wellpoint Health Networks Inc. Some are

owned by retail pharmacies, such as Caremark (owned by CVS), RX America (owned by Longs Drug

Stores), Rite Aid Health Solutions and Walgreens Health Initiatives. Wal-Mart Stores, Inc. also recently

announced that it may engage in certain activities competitive with PBMs. Also, there exist some

specialized providers, such as Argus and SXC Health Solutions that exist. In addition to these, other

companies may enter into the business and become increasingly competitive as there are no meaningful

barriers to entry.

Change of Ownership in PBM Industry

There has also been much ownership change and consolidation within the PBM industry. For example,

PCS Health Systems, Inc. (the PBM‘s current name), originally an independent company, was purchased

by McKesson Drug (a drug wholesaler), then Eli Lilly & Company (a pharmaceutical manufacturer), and

finally by Rite Aid chain pharmacy company in 1999. Another example of ownership change occurred with

DPS. The PBM developed within the UHC pharmacy department and began offering pharmacy

management services to non-UHC health plans. The drug manufacturer SmithKline Beecham purchased

DPS in 1994 and it was subsequently purchased by Express Scripts, Inc., an independent PBM in 1999.

Advantages for PBMs Owning a Pharmacy

PBMs can generate significant revenues from the pharmacy network when they have an ownership stake

in a pharmacy. Many PBMs have some level of corporate ownership with a pharmacy. When the PBMs

benefit programs are structured to promote the use of their own pharmacy, additional profits are

generated from the sale of its drugs. Although an ownership relationship between a PBM and a pharmacy

is not an absolute conflict, the potential will always exist for the PBM to provide preferential pricing

arrangements to its own pharmacy. In the commercial market, rebates are paid to PBMs almost

exclusively on branded products and rebates for generic products are typically offered at the pharmacy

level, including to those pharmacies that have an ownership relationship with a PBM.

6. Pharmacy Benefit Management- Regulatory Compliance

The following is the list of various sets of regulatory requirements which are applicable to PBMs in some

capacity.

Anti-Kickback Laws.

Subject to certain exceptions and ―safe harbors,‖ the federal anti-kickback statute generally prohibits,

among other things, knowingly and willfully paying or offering any payment or other remuneration to

induce a person to purchase, lease, order, or arrange for (or recommend purchasing, leasing, or ordering)

items (including prescription drugs) or services reimbursable in whole or in part under Medicare, Medicaid

or another federal health care program. Several states also have similar laws, some of which apply similar

anti-kickback prohibitions to items or services reimbursable by non-governmental payors. Sanctions for

violating these federal and state anti-kickback laws may include criminal and civil fines and exclusion from

participation in the federal and state healthcare programs.

Self-Referral Laws.

The federal physician self-referral law, known as the ―Stark Law,‖ prohibits physicians from referring

Medicare or Medicaid beneficiaries for ―designated health services‖ (which include, among other things,

outpatient prescription drugs) to an entity with which the physician or an immediate family member of the

physician has a financial relationship and prohibits the entity receiving a prohibited referral from

presenting a claim to Medicare or Medicaid for the designated health service furnished under the

prohibited referral.

Generally, PBM‘s home delivery pharmacies dispense certain outpatient prescription drugs that may be

directly or indirectly reimbursed by the Medicare or Medicaid programs, potentially making PBMs subject

to the Stark Law‘s requirements with respect to such pharmacy operations. Possible penalties for

violation of the Stark Law include denial of payment, refund of amounts collected in violation of the

statute, civil monetary penalties and Medicare and Medicaid program exclusion.

The PBM‘s home delivery services may also be subject to state statutes and regulations that restrict the

ability of physicians to refer patients to entities with which they have a financial relationship. These state

laws may vary from the federal Stark Law and vary significantly from state to state. Some of these state

statutes and regulations apply to items and services reimbursed by private payors.

False Claims Act and Related Criminal Provisions.

The federal False Claims Act (the ―False Claims Act‖) imposes civil penalties for knowingly making or

causing to be made false claims or false records or statements with respect to governmental programs,

such as Medicare and Medicaid, in order to obtain reimbursement. Private individuals may bring ―whistle

blower‖ suits against providers under the False Claims Act, which authorizes the payment of a portion of

any recovery to the individual bringing suit. Some federal district courts have interpreted the False Claims

Act as applying to claims for reimbursement that violate the anti-kickback statute or federal physician

self-referral law under certain circumstances.

State Fiduciary Legislation.

Statutes have been introduced in several states that purport to declare that a

PBM is a fiduciary with respect to its clients. Till date only two jurisdictions – Maine and the District of

Columbia – have enacted such a statute.

Consumer Protection Laws.

Most states have consumer protection laws that previously have been the basis for investigations and

multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies

in connection with drug switching programs. Such statutes have also been cited as the basis for claims

against PBMs either in civil litigation or pursuant to investigations by state Attorneys General.

Network Access Legislation.

A majority of states now have some form of legislation affecting the PBM‘s ability to limit access to a

pharmacy provider network or removal of a network provider. Such legislation may require PBMs or their

clients to admit any retail pharmacy willing to meet the plan‘s price and other terms for network

participation (―any willing provider‖ legislation); or may provide that a provider may not be removed from a

network except in compliance with certain procedures (―due process‖ legislation).

Legislation Affecting Plan Design.

Some states have enacted legislation that prohibits managed care plan sponsors from implementing

certain restrictive benefit plan design features, and many states have introduced legislation to regulate

various aspects of managed care plans, including provisions relating to the pharmacy benefit. For

example, some states, under so-called ―freedom of choice‖ legislation, provide that members of the plan

may not be required to use network providers, but must instead be provided with benefits even if they

choose to use non network providers. Other states have enacted legislation purporting to prohibit health

plans from offering members financial incentives for use of home delivery pharmacies.

Legislation has been introduced in some states to prohibit or restrict therapeutic intervention, or to require

coverage of all FDA approved drugs. Other states mandate coverage of certain benefits or conditions,

and require health plan coverage of specific drugs if deemed medically necessary by the prescribing

physician. Such legislation does not generally apply to PBMs directly, but it may apply to certain PBM

clients, such as HMOs and health insurers.

Licensure Laws.

Many states have licensure or registration laws governing certain types of managed care organizations,

including preferred provider organizations (―PPOs‖), third party administrators (―TPAs‖), and companies

that provide utilization review services. The scope of these laws differs from state to state, and the

application of such laws to the activities of PBMs often is unclear. Because of increased regulatory

requirements on some of PBM‘s managed care clients affecting prior authorization of drugs before

coverage is approved, PBMs obtain utilization review licenses in selected states through their subsidiary.

Legislation regulating PBM activities in a comprehensive manner has been and continues to be

considered in a number of states. In the past, certain organizations, such as the National Association of

Insurance Commissioners (―NAIC,‖ an organization of state insurance regulators), as well as certain state

pharmacy boards have considered proposals to regulate PBMs and/or certain PBM activities, such as

formulary development and utilization management. While the actions of the NAIC would not have the

force of law, they may influence states to adopt model legislation that such organizations promulgate.

Legislation and Regulation Affecting Drug Prices.

Some states have adopted so-called ―most favored nation‖ legislation providing that a pharmacy

participating in the state Medicaid program must give the state the best price that the pharmacy makes

available to any third party plan. Such legislation adversely affects PBM‘s ability to negotiate discounts in

the future from network pharmacies. Other states have enacted ―unitary pricing‖ legislation, which

mandates that all wholesale purchasers of drugs within the state be given access to the same discounts

and incentives. Such legislation, if enacted in a state where one of PBM‘s home delivery pharmacies is

located, could adversely affect PBM‘s ability to negotiate discounts on purchase of prescription drugs to

be dispensed by their home delivery pharmacies.

In addition, federal and state agencies and enforcement officials are investigating the effects of

pharmaceutical industry pricing practices such as how average wholesale price (―AWP‖) is calculated and

how pharmaceutical manufacturers report their ―best price‖ on a drug under the federal Medicaid rebate

program. AWP is a standard pricing benchmark (calculated by a third-party such as First Data Bank or

Medispan) used throughout the PBM industry, as a basis for calculating drug prices under contracts with

health plans and pharmacies and rebates with pharmaceutical manufacturers. Changes to the AWP

standard could alter the calculation of drug prices for federal programs.

Further, the federal Medicaid rebate program requires participating drug manufacturers to provide rebates

on all drugs purchased by state Medicaid programs. Manufacturers of brand name products must provide

a rebate equivalent to the greater of (a) 15.1% of the ―average manufacturer price‖ (―AMP‖) paid by

wholesalers for products distributed to the retail pharmacy class of trade and (b) the difference between

AMP and the ―best price‖ available to essentially any customer other than the Medicaid program, with

certain exceptions.

PBMs negotiate rebates with drug manufacturers and, in certain circumstances, sell services to drug

manufacturers. Investigations have been commenced by certain governmental entities which question

whether ―best prices‖ were properly calculated, reported and paid by the manufacturers to the Medicaid

programs.

Regulation of Financial Risk Plans.

Fee-for-service prescription drug plans generally are not subject to financial regulation by the states.

However, if a PBM offers to provide prescription drug coverage on a capitated basis or otherwise accepts

material financial risk in providing the benefit, laws in various states may regulate the PBM. Such laws

may require that the party at risk establish reserves or otherwise demonstrate financial responsibility.

Laws that may apply in such cases include insurance laws, HMO laws or limited prepaid health service

plan laws.

Pharmacy Regulation.

PBM‘s home delivery and specialty pharmacies are licensed to do business as a pharmacy in the state in

which they are located. Most of the states into which PBM‘s deliver pharmaceuticals have laws that

require out-of-state home delivery pharmacies to register with, or be licensed by, the board of pharmacy

or similar regulatory body in the state. These states generally permit the pharmacy to follow the laws of

the state in which the home delivery service is located, although certain states require that PBMs also

comply with certain laws in that state. PBM‘s various pharmacy facilities also maintain certain Medicare

and state Medicaid provider numbers as pharmacies providing services under these programs.

Participation in these programs requires the pharmacies to comply with the applicable Medicare and

Medicaid provider rules and regulations, and exposes the pharmacies to various changes the federal and

state governments may impose regarding reimbursement amounts to be paid to participating providers

under these programs. In addition, several of the pharmacy facilities are participating providers under the

new Part D Medicare program created pursuant to The Medicare Prescription Drug, Improvement and

Modernization Act of 2003. As a condition to becoming a participating provider under Part D of the Act,

the pharmacies are required to adhere to certain requirements applicable to the Part D Medicare

program.

Federal and state statutes and regulations govern the labeling, packaging, advertising and adulteration of

prescription drugs and the dispensing of controlled substances. The Federal Trade Commission requires

mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the

product to be sold, to fill mail orders within thirty days, and to provide clients with refunds when

appropriate.

HIPAA and Other Privacy Legislation.

Most of PBM‘s activities involve the receipt or use of confidential medical information concerning

individual members. In addition, PBMs use aggregated and anonymized data for research and analysis

purposes and, in some cases, provide access to such data to third parties. Various federal and state

laws, including the Health Insurance Portability and Accountability Act (HIPAA) regulate and restrict the

use, disclosure and security of confidential medical information and new legislation is proposed from time

to time in various states.

The HHS privacy and security regulations under HIPAA impose restrictions on the use and disclosure of

individually identifiable health information by certain entities. The security regulations relate to the security

of protected health information when it is maintained or transmitted electronically. Other HIPAA

requirements relate to electronic transaction standards and code sets for processing of pharmacy claims.

PBMs are required to comply with certain aspects of the privacy, security and transaction standard

regulations.

7. PBMs and Medicare Part-D Program

7.1 Medicare Part –D: An Overview

The Medicare prescription drug, Improvement, and Modernization Act (MMA) of 2003 is said to bring

Medicare into the modern age of health insurance by adding the first outpatient prescription drug benefit

in its four-decade history.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug Improvement and

Modernization Act of 2003 (Pub. L. 108-173). This landmark legislation provides seniors and individuals

with disabilities with a prescription drug benefit, more choices, and better benefits under Medicare

Formation of MEDICARE Part – D

Section 101 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)

established a new voluntary prescription drug benefit. The Centers for Medicare and Medicaid Services

(CMS) explained the significance of adding voluntary prescription drug coverage to Medicare in its final

regulations to implement this law

Congress required that the Medicare prescription drug benefit be implemented by private sector

healthcare insurers so that competition could ensure that enrollees receive low prices for prescription

drugs. Congress, as well as CMS, anticipates that PBMs will help administer the benefit and that they will

use established commercial practices and techniques, to manage the drug benefit.

7.2 Selection of PDP Providers

The MMA authorized CMS to develop a bidding system in which potential prescription drug plan (PDP)

sponsors would seek to offer prescription drug insurance to Medicare enrollees. To ensure all senior

citizens are covered, CMS divided that United States into 34 geographic areas, in each of which it seeks

to have at least two different PDP sponsors offer full risk plans to Medicare enrollees. If this process does

not result in two entities offering ―full risk‖ plans to eligible enrollees in the geographic area, the MMA

contains backup provisions to ensure that at least two PDPs are offered to senior citizens.

The MMA requires potential PDP sponsors to submit bids that ―reflect that applicant‘s estimate of its

average month‘s revenue requirements to provide qualified prescription drug coverage (including any

supplemental coverage) for an eligible individual with a national average risk profile. The bid must include

all costs the plan estimates it will incur in each PDP region to provide basic and supplemental benefits,

including administrative costs and return on investment.

The MMA authorized CMS to review, negotiate, and approve PDP sponsors for each region based on an

applicant‘s qualifications and bid submission. CMS must consider various factors, including whether the

bid reasonably and equitably reflects the plan‘s revenue requirements and has actuarial support, and

whether the plan design (such as the formulary and utilization management tools, including drug

exclusions and tiered copayments) is fair and does not discourage enrollment by certain eligible

enrollees. Congress authorized CMS to approve as many PDP providers in an area as they meet these

qualifications.

MMA Requirements for Pharmaceutical Payments

Because the MMA anticipates that competition among PDP providers will ensure competitive pricing,

CMS does not specify the amounts or percentages of pharmaceutical payments that should be passed

through to Medicare enrollees.CMS anticipates that each PDP‘s bid will provide for a significant

percentage of pharmaceutical payments passed through to Medicare beneficiaries, so that the overall bid

is competitive. CMS does specify, however, the types of payments that must be passed through to

Medicare for fallback plans (which assume no risk and are not part of the regular bidding process).

Regardless of the pass-through for purposes of determining price to the enrollee or Medicare, all PDP

sponsors must provide CMS with information concerning all price concessions they receive from

manufacturers, including confidential accounting of how they are used.

MMA Plan Design Requirements

The MMA also required that each PDP contain certain features regarding, for example, formulary

development, formulary drugs, and the scope of the retail pharmacy network. CMS regulations require

that a PDP‘s P&T committee develop the formulary and include within each therapeutic category at least

two drugs that are not therapeutically equivalent and bioequivalent, with different strengths and dosage

forms available for each of those drugs.

CMS explained that not all drugs must be on a PDP sponsor‘s formulary. If a category or class includes

only one drug, then only that one must be on the formulary. The formulary must also ―include adequate

coverage of the types of drugs most commonly needed by Medicare enrollees, as recognized in national

treatment guidelines.‖

The final regulations set forth the acceptable distances within which all plan beneficiaries must live to a

network pharmacy, adjusted for urban, suburban, and rural areas. For example, at least 90% of Medicare

beneficiaries, on average, must live within 2 miles of a retail network pharmacy in urban areas served by

the PDP and within 5 miles in a suburban area; 70% of beneficiaries must live within 15 miles in a rural

area. In addition, the MMA allows Medicare beneficiaries to fill prescriptions at a retail pharmacy rather

than through a mail-order pharmacy, but they could be charged more for doing so.

7.3 Role of PBMs

On January 1, 2006, the federal government began Medicare Part D as a drug benefit plan with the

stated goal of providing seniors with affordable prescription drugs. By some estimates, Medicare Part D is

projected to cost $678 billion dollars over the first 10 years and $8.1 trillion dollars over the next 75 years.

Healthcare fraud may add an additional 5% to these cost projections. In 2004, the federal government

lost about $20 billion dollars to healthcare fraud. Medicare Part D creates a lucrative market for the

pharmaceutical industry and a lucrative target for drug pricing fraud to induce improper overpayments of

drug benefits by the federal government.

Medicare Part D as discussed above requires the federal government to contract with private entities as

sponsors of approved Part D prescription drug plans. Most Part D sponsors are managed care

organizations (―MCOs‖), such as Blue Cross/Blue Shield, which then contract with pharmacy benefit

managers (―PBMs‖), such as Medco Health Solutions, Inc., to provide pharmacy benefit services such as

mail order service and access to retail pharmacies. A PBM‘s main purpose is to control a MCO‘s costs

through negotiated discounts from pharmaceutical manufacturers and reduced reimbursement rates from

retail pharmacies.

To increase market share and revenues, pharmaceutical manufacturers bargain with PBMs to place their

drugs on PBM drug formularies, to market their drugs, and to switch prescriptions to their drugs. In return,

the pharmaceutical manufacturers provide PBMs some form of remuneration (for example, a rebate). In

some cases, pharmaceutical manufacturers have been accused of artificially inflating their drugs‘ list price

(published as the ―Average Wholesale Price‖) to help PBMs earn hidden fees from MCOs. MCOs

reimburse the PBMs based on the list price, and the PBMs retain any difference between that list price

and the actual cost charged to the PBMs by the drug maker.

In the context of Medicare Part D, the federal government has deemed such actions to be fraud and

requires Part D plan sponsors to take certain actions that will allow the federal government to achieve

better drug prices and reduce program costs. Unfortunately, Medicare Part D‘s untested measures will

probably fail to adequately meet the government‘s objectives.

Medicare Part D requires prescription drug plan sponsors to disclose all negotiated discounts (i.e.

rebates, subsidies, remuneration) to the federal government and to pass along the savings to the

government and beneficiaries. The sponsors must disclose the costs actually paid (net of discounts,

chargebacks, and average percentage rebates) by the sponsors to retail pharmacies and pharmaceutical

manufacturers. This cost information is required to insure that the federal government does not overpay

(in the form of direct subsidies and reinsurance) sponsors for the drug benefit. In addition, the

government has the right to audit the sponsors‘ financial statements and records to insure compliance

with these requirements.

Mail Medicare Challenge for PBM - Risk

For PBMs not owned by insurers, the most formidable challenge presented by the Medicare prescription

drug benefit is taking risk as an insurer. PBMs today are not in the business of insurance. Most do not

hold state insurance licenses, they do not maintain reserves in the way that insurers do, and they lack the

capabilities that insurers have to underwrite—that is, to assess risk and set premiums. PBMs also assert

that their slim operating margins—typically 1–3 percent—leave them insufficient cushioning to absorb

losses should claim costs exceed premium income. There are valid concerns about the risk in a Medicare

PDP, a novel concept that entails voluntary individual enrollment in a drug-only insurance plan.

Unpredictability. Absent any directly pertinent history, predicting use and costs in a stand-alone drug

plan is challenging. Data from existing full-spectrum health benefit plans will be useful but will not be

reliable when translated to a single-benefit plan design. Also limiting the ability to forecast use and costs

is the ever-changing drug market. Existing drugs may start being used for new indications, whether

approved or not by the U.S. Food and Drug Administration (FDA). New drugs, many with very high price

tags, come onto the market regularly, and it is uncertain whether some new drugs will fall under Medicare

Part B or Part D. This all gives an unstable basis upon which to compute premiums.

Lack of control. PDPs will lack contractual relationships with the most forceful drivers of pharmacy

benefit costs: physicians who prescribe medications for their patients. PDPs can try to educate

physicians, and they can try to influence prescribing behavior through benefit plan and formulary design,

but they cannot sanction physicians whom they evaluate as having costly or otherwise inappropriate

prescribing patterns.

Adverse selection. Enrollment in Medicare PDPs will be voluntary and will be free only to beneficiaries

with the lowest incomes. These qualities make the program fertile ground for adverse selection, in which

the people most likely to enroll are the ones who know that their costs will exceed the premiums they pay.

Congress sought to thwart adverse selection by penalizing any beneficiary who fails to enroll in a PDP

when first eligible, but the penalty—now set at 1 percent of premium for each month of delayed

enrollment—may be too low, particularly at the start of the program, to prevent people from signing on

late if their medication costs rise in the future.

Congress did try to mitigate PDP risk. MMA stipulates that would-be PDPs lacking state insurance

licensure can instead satisfy a federal solvency requirement to be defined in regulation. Congress also

designed a less-than-full-risk model that applies in the early years. Under that model the government will

share in PDP underwriting losses—and in gains as well. The protections afforded are largest in 2006–

2007, then tail down in 2008–2011, then phase out.

Other Medicare Challenges For PBMs

MMA contemplates having Medicare taking advantage of PBMs‘ best capabilities, but the statute does not

leave everything up to the vendors. The act contains myriad stipulations about PDPs‘ functionality, some

of which mirror the demands that private-sector clients place on PBMs but others of which impose

expectations or constraints that PBMs have not seen before.

Access, (1) PDPs must cover whole geographic regions with pharmacy networks that match the access

standards of the Defense Department‘s TRICARE program: 90 percent of urban enrollees must have a

participating pharmacy within two miles of home; 90 percent of suburban enrollees must have a

pharmacy within five miles; and 70 percent of rural enrollees must have a pharmacy within fifteen miles.

This rule is not a major barrier for the largest PBMs. In fact, the top PBMs will probably seek new

contracts with pharmacies specifically for Medicare, so that they can structure their networks to meet the

access standards. The access requirement will present a hurdle for less well established players. (2) The

statute also contains an ―any willing pharmacy‖ provision, meaning that a PBM cannot exclude

pharmacies that agree to its terms of participation. This rule could handcuff some PBMs whose strategy is

to limit the numbers of pharmacies to extract deeper discounts, although imposing higher copayments for

use of less favored pharmacies might be a way around this barrier. (3) The law states that PDPs must

allow enrollees to fill ninety-day prescriptions—typical of chronic medications—at community pharmacies

as long as they pay the difference in charges between that and the mail-service cost. This provision

diminishes PBMs‘ opportunities to profit from their own mail-service operations; again, though, copayment

structures can be used to steer beneficiaries where the PBM wants them to go.

Formulary. (1) Medicare PDPs must offer drugs within each therapeutic category and class. The plural

word ―drugs‖ in the statute has been interpreted by the CMS to mean that a PDP must offer more than

one drug in each therapeutic category. This feature conceivably limits PBMs‘ ability to move market share

to selected manufacturers‘ products and win favorable rebate deals. PBMs do not expect this constraint

to limit their bargaining leverage, though, for two reasons. First, any PDP that covers only one drug per

category would not attract many enrollees. Second, PDPs will have latitude to define benefit tiers so that

even when two or more drugs in a category are covered, the PDP could give richer coverage to just one

drug. (2) The statute assigns the United States Pharmacopeia (USP), which must consult with PBMs and

other stakeholders, the task of defining therapeutic categories and classes to guide PDPs in structuring

formularies. Having the independent USP create guidelines is a way to keep PDPs from skewing

formularies away from the drugs needed by beneficiaries with the costliest conditions. Also, the more

classes and categories that are created—each containing a smaller number of drugs—the less latitude

PDPs will have in setting up formularies. A draft of the USP plan dated 16 August 2004 listed 146

classes. PBMs reportedly were advocating for there to be no more than 90 classes, whereas

pharmaceutical manufacturers were pushing to have more than 200 classes. (3) A PDP must notify the

HHS secretary and ―affected enrollees, physicians, pharmacies and pharmacists‖ of the removal of a drug

from its formulary or any change in a drug‘s coverage status from a preferred to a nonpreferred tier. The

CMS had stated that Web-site postings alone will not suffice as notice; written formats also will be

required. This requirement poses an administrative burden and cost for PBMs operating PDPs.

Exceptions and appeals process. MMA requires a PDP to have an appeals process similar to that

required of MA plans. The process must deal with coverage denials based on application of the formulary.

A beneficiary may appeal a denial if the prescribing physician determines that covered drugs in any

formulary tier would not be as effective for the individual as a nonformulary drug, or would have an

adverse effect for the patient, or both. Appeal rights extend to situations where a drug is on the PDP‘s

formulary but in a nonpreferred tier. Some PBMs worry that the appeals process could become unwieldy,

but others think that the volume of appeals will not be large because physicians will resist taking on the

unpaid task of helping their patients to appeal.

Financial disclosure. MMA requires PDPs to disclose to the HHS secretary the aggregate value of price

concessions they receive and pass through in the form of subsidies, lower beneficiary premiums, and

lower prices through pharmacies and other dispensers (as when a beneficiary pays out of pocket when

there is a gap in coverage). PBMs, which keep a close hold on their financial dealings with drug makers

and others, say that they are not troubled by this requirement for disclosure of aggregated information.

They successfully fought more granular disclosure requirements that were proposed during the crafting of

MMA, and they continue to oppose similar state-level legislative proposals.

Marketing. PDPs will have to adhere to the same marketing rules that apply to MA plans—rules

prohibiting aggressive and deceptive practices. The challenge for PBMs that would offer their own PDPs

is not the nature of the rules; it is the mere fact of selling directly to consumers. PBMs normally sell not to

individuals but to group buyers such as employers and health plans. So a PBM that offer its own PDP

would have to build—or buy—marketing capability. A number of PBMs are using the Medicare-endorsed

discount drug card program as an opportunity to develop such capability now.

Insurer-owned PBMs, meanwhile, are well positioned to team with their parents that do have risk-

management machinery

8. Medicaid Pharmacy Benefits Management

Medicaid was established as a federally mandated and state-operated program to provide healthcare and

related benefits to Americans unable to afford such benefits. In 2006, Medicaid provided health coverage

and long-term care assistance to more than 55 million people. This included the provision of Medicaid

services to 41 million people in low-income families and nearly 14 million elderly people and persons with

disabilities.

Impact of the Medicare Modernization Act on States

The Medicare Modernization Act (MMA) of 2003 created a significant expansion of the Medicare

programs by establishing the new Medicare prescription drug benefit (Part D). The new coverage has

major implications for the states‘ Medicaid programs because, for the first time ever, beneficiaries who are

eligible for both Medicare and Medicaid (dual eligible) now receive prescription drug benefits not from

Medicaid but from Medicare.

Medicaid Pharmacy Benefits Design

Most state managed care Medicaid plans include pharmacy benefits as part of their contracting,

comprehensive medical capitation rates, as is the case in commercial managed care plans. Some states

―carve out‖ the pharmacy benefit from the capitation rate and reimburse for drugs on a separate fee-for-

service arrangement. State Medicaid managed care contracts usually make provisions regarding drug

coverage and formulary status that require coverage of similar therapeutic products that are covered

under the state‘s fee-for-service formulary. In many states that would include selected non-prescription

(over-the-counter [OTC]) medications and prescription drug products.

Medicaid Prescription Copayments

Most states have small copayments for pharmacy services in the Medicaid program. These copayments

vary from state to state per prescriptions and may be dependent on whether a generic or brand name

drug is dispensed or whether a preferred or non-preferred drug is dispensed. It is widely recognized that

even a small copayment can act as a significant barrier to patient drug therapy adherence in low-income

populations. For this reason alone, some states have eliminated the copayment requirement as they do

not wish the copayment to be a barrier that prevents a pharmacy from withholding treatment based on

Medicaid patient‘s inability to pay the copayment.

9. The Role of IT in PBM Industry

Information is critical for the successful operation of any business or interpersonal interaction, including

HealthCare. Corporations require complete, accurate and timely information to make mission critical

decisions and review the results of previous decisions. Physicians, pharmacists and other healthcare

professionals require information whenever they access a patient‘s medical condition, evaluate the effect

of previous treatment, and alter the treatment plan. The healthcare industry needs to recognize that

upgrading an information system is neither an option nor an excuse. Rather, new information systems

should be enthusiastically viewed as an investment necessary for future survival.

9.1 The Need for IT

In the early 1990‘s, health care system in US was fragmented and not well connected. Lack of

connectedness and continuity among various stakeholders reinforced each segment of the industry to

function individually. For example, pharmacies were not interconnected to prescribers or laboratories, and

prescribers were not interconnected to payers. The fragmentation of the prescription management made

the process expensive, unsafe, inefficient and dissatisfying to the customers. At the time physicians

provide care to their patients, their access to critical information was limited by time and resources.

Patient medication history, clinical references, and formulary rules were not typically available.

Pharmacies faced many issues related to excessive amount of illegible prescriptions, clinical interactions,

and formulary restrictions. Pharmacists had to embark on a barrage of phone calls to physicians and

insurers. In the case of calls made after office hours, physicians might not return the call until the next

business day. Often, a single prescription went through a number of loops among a prescriber, a

pharmacist and an insurer before shipment of medication to the intended patient. As the whole process

was inefficient, time-consuming and costly, the need for a new system was evident and justified. It was

believed that technology could resolve many of these flaws in terms of process improvements and the

PBM industry slowly adopted the technological solutions.

9.2 IT Dependency

Pharmacy Benefits Management relies heavily on advancing the current data and information systems to

support the growing expectations of internal and external customers, to support core services, and to

move pharmacy management into a new generation of advanced program components, including

pharmaceutical care and disease management. Dealing with advancements and changes like these has

fallen squarely upon the information technology departments to implement new and innovation programs.

Our healthcare delivery system has three basic goals: to improve the quality of care, to provide

reasonable access, and to provide a fair method of financing care. Success in balancing these goals

remains elusive, as quality has been a subjective measurement in the past. Critical to success, therefore,

is first finding a way to objectively measure how effectively and efficiently healthcare is being delivered in

a changing society. The following questions become very important. In a society where medical

technology and clinical knowledge are expending exponentially, how can a medical practitioner be sure to

deliver the highest quality care? As increased technology adds significantly to the cost of acre, how do

health-plans and other stakeholders measure the value of competing technology such as

pharmaceuticals? As the nation‘s largest service industry grows, within a world of rapidly developing

information technology (IT), the challenges are formidable. This chapter explores the growing IT needs of

managed pharmacy programs and discusses the opportunities and challenges involved in achieving a

higher level of IT sophistication.

9.3 Benefits of IT

From a historical perspective, pharmacy information and claims processing systems have evolved

significantly in recent years. In the 1970s, pharmacists used typewriters and completed manual claim

forms. Today, interactive, online, real-time systems maintain detailed electronic records and permit

pharmacists to submit a claim to a payer or payers and have a response back in seconds. This enormous

change has resulted from advances in computing, information management and communication.

Inclusion of pharmacy benefits as a component of managed health care also has greatly contributed to

the adoption of this new information paradigm into the PBM industry. The entire practice of pharmacy has

been immutably altered through automation and the introduction of information processing and

information management technology into nearly all aspects of the delivery process. Information

Technology has paved the way for the development and usage of pharmacy information and claims

processing systems. It attributes to pharmacy automation that augments the business and patient care

aspects of PBM industry like dispensing and pharmacy claim adjudication. The Internet has made

substantial inroads into the delivery, administration, and reimbursement of health care services, as well

as into consumer health information. In the 21st century, the Internet will increasingly serve as a low-cost,

rapid method for disseminating health information. IT has helped the PBM Industry plan, build and

manage network solutions locally, nationally, and globally to:

Lower the network's Total Cost of Ownership

Maximize the return on investment

Gain better control of network resources

Acquire specialized design expertise

Expedite project implementation

Minimize risk & complexity

Resolve compliance issues

IT Solutions brings together talent, technology, and trust to the PBM industry with a specialized focus on Unified Communications, Data Center, Security, Infrastructure and Mobility solutions.

9.4 IT Services in PBM Industry

Today the Information technology provides a broad range of pharmacy spend management solutions and

information technology capabilities. The product offerings and solutions combine a wide range of PBM

software applications, application service provider (ASP) processing services, and professional services

designed for many of the largest organizations in the pharmaceutical supply chain, such as pharmacy

benefit managers, managed care organizations, self-insured employer groups, retail pharmacy chains,

and state and federal government entities. All segments of PBM industry recognize the critical need for

data, and the evolution of IT in PBM industry is occurring rapidly. However, even though the need for

sophisticated IT is recognized, the industry has been criticized for underfunding IT investments. The

healthcare industry overall spends only 2 percent of operating expenses on IT, compared with the 6

percent to 8 percent investments by heavy industry, or the 8 percent to 12 percent investment by banking

industry. But this trend is changing: PBMs now realize the critical need for and competitive advantage of

maintaining sophisticated information systems and are increasing their IT investments. They need to

choose between building, owning and maintaining internal information systems or outsourcing their

information systems needs.

A model describing the integrated PBM functions is shown below:

The Information technology is assisting PBM industry in many areas. These are described below:

Formulary Administration

The integrated solutions on formulary development and maintenance fully support PBMs‘ existing

formularies and preferred drug lists or collaborate to create best-in-class models supported by formulary

predictive modeling and impact analysis. Formulary administration consists of ongoing medical reviews of

therapeutic drug classes, continual updating of the formulary, development of plan designs that foster the

use of the most cost-effective medications and constant communication with both the Plan Members and

their Providers.

A formulary is a preferred list of cost-effective drugs, designed to promote the use of clinically appropriate

drugs whenever possible. A committee of practicing physicians and pharmacists routinely monitor and

make changes to formulary. The Committee evaluates new drugs based on their safety, efficacy and

patient acceptability. Only if these attributes prove comparable or superior to existing drugs is the cost of

the new drug considered. Then, only if the daily cost of the new drug is less than that of existing drugs is

the new drug added to the formulary. The pharmacists at participating pharmacies communicate with

patients and their physicians about the use of cost-effective prescription drugs. They routinely monitor

pharmacy compliance with the formulary.

Information technology promotes pharmacy benefit designs that enhance compliance with the formulary.

This includes the judicial use of financial incentives for Plan Members, which encourages formulary

compliance because it benefits the Plan Members. It can administer formularies based on specific plan

designs, or can provide PBMs with the tools to maintain their own custom formularies online. They also

notify participating pharmacies on-line whether a drug being dispensed to a Plan Member is on

organization‘s formulary. Pharmacist, physician and member-focused intervention protocols provide

quality controls to drive generics, preferred drug products and appropriate use.

Benefit Plan Design and Management

Before getting into the Benefit Plan Design and Management, let‘s first understand what a Benefit Plan

means.

A Benefit Plan provides a member with a set amount of money in the form of an annuity. The amount of

compensation is typically based on a few factors such as duration of employment with the company and

salary history as of retirement. Employees who opt for early retirement will receive a lower monthly

amount to compensate for the longer duration of future benefits. Upon determining retirement benefits,

the employer must now fund the defined benefit plan. Employers will fund an account in which they will

be able to make investments to meet the goals of the eventual monthly payments to the employee.

Investment risk and management are at the discretion of the company; however, the retirement benefit to

the employee will not be at risk. Actuaries are employed to project future earnings potential and potential

investment returns in the investment account. This will allow the employer to understand how much they

need to fund the defined benefit plan account with.

Designing a plan to customize the need of a member / group is called Benefit Plan Design. The Benefit

Plan Design includes the following:

Self-insured and fully insured analysis and recommendations

Consumer-Driven Health Plan design and implementation

Individual benefit plan analysis and recommendations

Funding analysis and recommendations

The PBMs use information technology to accommodate plan design options required and support an

unlimited number of benefit design variations. Some information technology vendors working for PBMs

also provide benefit design configuration support, in accordance with mutually developed processes.

Benefit designs can be modified and made suitable to the changing need of the PBMs.

Pharmacy Network Management

This includes supporting a wide range of retail network options, including supporting existing networks or

assisting clients in developing proprietary networks that meet specific geographic access requirements,

desired price discounts, or other service requirements. For Medicaid populations, services can include a

national Medicaid network with Medicaid maximum allowable cost (MAC) pricing. A network management

in pharmacy business would mean establishing an online network with the contracted retail pharmacies of

the organization. Automating the network will make the process faster and better.

Drug Utilization Review

Pre-dispensing DUR edit checks are performed on an online, real-time basis between mail and retail

pharmacies. All prescriptions are checked for participant eligibility and plan design features and are then

compared against previous histories of prescriptions filled by the same pharmacy, by other participating

retail network pharmacies and by the mail service pharmacy.

Clinical Services

IT contributes technical expertise to augment, develop, deploy and support any additional clinical

programs. PBMs also use pre-developed clinical programs, which incorporate complete prescription drug

information to reduce the growth rate of prescription drug costs and increase the quality of care and

member safety. The approach followed to managing the prescription drug benefit focuses on utilization.

Many PBMs even obtain a comprehensive clinical management strategy that addresses potential fraud

and abuse, compliance and utilization management, to drive the highest quality of care, with potential

ingredient cost savings. Pre-developed clinical programs are structured to meet the regulatory standards

of NCQA, as well as those of state and federal agencies.

Automated Mail Order Delivery

Implementing Information Technology in home delivery pharmacy brings an easy, cost-effective and

convenient way for members to fill prescriptions for maintenance medications. For plan sponsors, home

delivery is an important element of an overall strategy for improving patient care and controlling plan

costs. An effective home delivery program can save plan sponsors as much as 20% on their pharmacy

benefit spend. Home delivery can increase compliance, the use of generics and adherence to formulary

structures. It can also help prevent health complications through the use of DUR edits that notify mail

facility pharmacists about specific patient conditions or plan parameters. Integration of mail with other

services means that all relevant patient and plan information can be accessed through a single system.

Therefore plan features such as prior authorization guidelines, refill too soon or drug interaction alerts can

be applied to mail service claims. This tight integration maximizes the opportunity for cost savings and

improves health outcomes for members.

Web Services

Web Services enables PBMs to interact with the claims processing system using a standardized protocol

in a secure environment. This method of access can provide them with the freedom to build products,

tools and reports that utilize data throughout their enterprises depending on the extent of technology

implemented. It can be used by the PBM as appropriate, thus providing far greater flexibility and return on

investment. Moreover, PBMs also develop web-portals which invite members to learn more about their

prescription benefit programs, medication histories, drug information and related industry news. These

web-services save the organization on time and effort and make the process more efficient.

9.5 eHealth

The use of emerging information technology, especially the Internet, to improve or enable health or health

care is known as electronic health or eHealth. eHealth is the intersection of medical informatics, public

health and business, delivering health services and information through Internet and related technologies.

It combines both the clinical and non-clinical sectors of PBM industry and includes individual and

population health-oriented tools. In the broader sense, it represents a commitment for networked, global

thinking to improve health care locally, regionally and worldwide by using information and communication

technologies.

Origin and Evolution of eHealth

The concept of eHealth began with the need to provide and support care from a distance. Call centers

were an example of a solution. Many types of call centers are used in the health care industry. The

following are examples related to pharmacy.

Poison control centers

Drug information centers

Pharmacy help lines

Home care centers

As the Internet was evolving in the late 1990‘s, entrepreneurs and venture capitalists invested heavily in

the notion of widespread use of information technology. eHealth companies emerged everywhere and

some aided physicians and health care providers with clinical information, billing and office management

services while others focuses directly on patients, giving them new access to information about specific

problems and disorders. All these ventures used the new Internet medium to deliver products and

services that they hoped would revolutionize health care industry. Classic examples of these sites include

DrKoop.com, Drugstore.com and PlanetRx.com.

Domains of eHealth

There are currently five domains of eHealth, with constant modifications and reinventions. They are

content, commerce, computer technology, connectivity and care.

Content

This domain is represented by websites providing health related information online. It promises to deliver

convenient access to information. An example of a consumer content website is WebMD and that of a

professional content website is Medscape. Health on the Net (HON) (www.hon.ch) is a non-profit

organization designed to aid non-medical internet users to reliable and valid information on health related

issues. Web pages that meet the standards set forth by HON can display its HON code logo, indicating

that such high standards are met.

Commerce

This domain is based on the principles of eCommerce. This domain is well exemplified by Internet

Pharmacies. Internet Pharmacy capabilities are now available for practically every retail chain. At present,

traditional brick and mortar pharmacies wither partner with existing Internet pharmacies or create their

own web counterparts, which illustrates the increasing importance of business on the Internet.

Examples: Retail giant CVS pharmacy acquired the Internet Pharmacy soma.com. Walgreens launched

an upgraded, full-service Internet pharmacy to compete successfully in PBM industry.

Computer Technology

This domain is defined as facilitating provision of health services, both clinical and administrative, through

computer applications. These technologies promise to improve quality of care, influence prescribing

behavior, decrease drug spending and administration burden. Examples include ePrescription, smart

cards and electronic medical records. ePrescription is a term that applies to automation of the prescription

writing process. Smart cards have an embedded computer chip, which can store patient medical records

and insurance information.

Connectivity

This domain involves connecting participants in the provision of health care services. Two organizations,

RxHub and SureScripts created by pharmacy benefit managers and retail pharmacies, established an

electronic system that would connect all parties in the ePrescribing process. Another example extends to

the pharmaceutical industry and the practice of physician detailing by pharmaceutical sales

representatives. There are attempts to virtually detail physicians by electronically connecting physicians

with sales representatives. Yet another example is online patient communities, which allow for peer-to-

peer and person-to-person messaging, information exchange, emotional support and community building.

Care

This domain, also referred to as telemedicine, is directly involved in provision of patient care.

Telemedicine uses communication and IT to deliver health care services over large and small distances.

It is a process whereby a patient and a health care provider are connected at the point of care in a timely

manner. The interaction can take place by telephone, fax, email, internet, biometric sensors, etc. For

example, a patient with a heart condition can have the heart electro stimulator adjusted over the internet

by a physician located hundreds of miles away. However, the depersonalization of care, along with legal

and legislative restriction and provider resistance limit the use of this domain.

9.6 EDI in PBM Industry

Definition

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business data in standard formats. In EDI, information is organized according to a specified format set by both parties, allowing a "hands-off" computer transaction that requires no human intervention or rekeying on either end. All information contained in an EDI transaction set is, for the most part, the same as on a conventionally printed document.

EDI Standard

An important factor that accelerated the adoption of electronic pharmacy commerce was the presence of

an accepted electronic data interchange (EDI) standard. This standard permits the submission of

pharmacy claims and the adjudication of those claims in a real-time interactive mode. The standard has

allowed the pharmacy profession an unparalleled position in electronic commerce when compared to

other segments of the health care industry. National Council for Prescription Drug Programs (NCPCP)

establishes monitors and maintains standards of information processing for the pharmacy services sector

of the Healthcare industry. NCPDP has been involved in the development and evolution of pharmacy data

transmission standards and is recognized by the American National Standards Institute (ANSI) as an

American Standards Developer in pharmacy electronic data interchange (EDI). This recognition will help

NCPDP‘s efforts to develop standards for pharmaceutical information processing which will in turn

facilitate the information transfer processes involved in pharmaceutical care delivery.

EDI standard, which allows communication between pharmacies and hundreds of payers, permits over

95% of all prescription claims to be processed electronically. From an information perspective, the

NCPDP communication standard provides a common, comprehensive, well-defined set of data elements

to feed the various information systems now present in the pharmaceutical distribution channel. The

move to this electronic telecommunication standard was spurred on by the Federal Legislation known as

HIPAA (Health Insurance Portability and Accountability Act). This act mandated standard transaction

code sets with the intent to simplify the administration of systems handling electronic transmission of

health information and to protect confidential patient information. The online transactions submitted by

pharmacies to payers are currently being transmitted in the NCPDP 5.1 standard. The legislative bodies

have reviewed the updates to 5.1 version and have proposed a new version known as NCPDP D.0

standard.

PBMs operate electronic data interchange (EDI) systems that link in with retail pharmacy computer

systems and manage Rx claims process. Patients‘ health insurance information is entered into system,

and EDI informs pharmacist about benefits and patient copayments/coinsurance requirements. Electronic

bill created and reimbursement process then managed by PBM. PBM works with patient‘s insurance

carrier for payment, and cedes resulting payment to retail pharmacy.

Benefits of EDI

PBM Organizations have adopted EDI for the same reasons they have embraced much of today's

modern technology-enhanced efficiency and increased profits. Benefits of EDI include:

Reduced cycle time

Better inventory management

Increased productivity

Reduced costs

Improved accuracy

Improved business relationships

Enhanced customer service

Increased sales

Minimized paper use and storage

Increased cash flow

The EDI capabilities using Internet technology will enhance the ability of all trading partners to

communicate and transfer data, so systems will provide more cost-efficient and better quality healthcare

services. The pharmaceutical delivery and claims adjudication channel has exploited and adopted

emerging computer and communication technology spurred on by new electronic data interchange

standards. In just decades, pharmacy systems have evolved from paper-based, manually intensive

systems that took long periods of the time to process claims, to sophisticated and powerful electronic

recordkeeping systems that can exchange data to adjudicate a claim or gather information for

pharmaceutical care in seconds.

9.7 Data Warehousing

The pharmacy systems and technological advances in pharmacy systems, switching, and third-party

adjudication programs are integral to patient care and to the cost-effectiveness of pharmacy practice.

With the majority of Americans now enrolled in some form of managed care, MCO management

information systems now store unprecedented amounts of data regarding member functions, provider

functions, claims administration, clinical management, rebate administration, and financial details. These

systems and those discussed above fall under the general heading of online transaction processing

(OLTP) systems.

OLTP and OLAP Systems

In a very real sense, the OLTP systems and advances in technology have made it possible to collect

billions of prescription records every year. While handling this great volume, today‘s systems must also

effect changes in prescribing and patient drug usage patterns to benefit the affected patients and perhaps

reduce the costs of drug therapy and improve overall health care for a particular patient or patient

population. Some of these challenges have been met by the advances in the pharmacy management

systems and the PBM systems, but further challenges remain. Even more effective clinical and financial

systems can be developed, once new challenges and goals are discovered and targeted. To discover

these new opportunities will depend squarely upon creating systems that take the online real-time data

and present them to clinical pharmacist or other healthcare knowledge worker in a way that advances

prospective DUR, disease state management, incentive-based cost management (rebate programs), and

other emerging business models. This analysis requires the systems to reduce huge amounts of data to

simple, understandable information for decision makers. The challenge is to ―mine‖ the information to

detect fraud, unanticipated facts, discover trends and patterns, and to organize and present the data for

other healthcare and benefit professionals.

The difference between an OLTP system and an online analytical processing (OLAP) system are

straightforward. OLTP systems are efficient operational systems that adjudicate claims and collect data,

while OLAP systems transform the data collected by the OLTP systems into decision support tools. These

decision support tools then enable the clinical pharmacists to concentrate on the information being

gathered and to act upon the data by making changes to OLTP system, by interacting with the affected

patient population, the prescribing population, or by designing outcomes studies to further explore health

situations.

Data Warehousing and Business Intelligence

OLAP systems are often called data warehouses or data marts. The graphical presentation of the

relational or multidimensional views of these data repositories are often termed decision support systems

or executive information systems. A data warehouse is a process whereby data from transaction-based

systems are collected, integrated, and delivered to end users expressly to support data or clinical analysis

activities. An OLAP system assembles the data, transforms the raw data into a form suitable for analysis,

distributes the data, and provides access to the information store. Today, virtually every MCO has some

type of data repository and many have several tailored to capitalize on unique opportunities.

This idea of extracting the data from disparate systems, transforming it, and delivering it to the end users

is popularly known as ―business intelligence‖. Simply put, these systems are a home for second hand

data for utilization data, customer relationship management (CRMs) data, marketing data, and rebate

data. The transformation of all these data from different systems involves checking them for gaps, missing

values, business rules, and looking at the data for reasonableness.

In addition, the transformation process may add values for the end users, like tagging a utilization record

with a disease state. The goal of business intelligence is to deliver the right amount of information and

analytical power to fit the user. One of the tenets of business intelligence is the fact that not all users of

data have the same sophistication or the same goals. Users can range from dedicated power user like a

data analyst to the casual user or a report consumer. The distribution of these consumers resembles a

pyramid with a small number of report authors to a large number of report consumers or readers. The

tools employed can range from simple reports to business intelligence tools that require months of

training and a strong educational background in mathematics, statistics, and the appropriate clinical

disciplines. These are known as power users. Coupled with delivering the right amount of information to

the right users is also the ability to secure the information. Allowing for legal and appropriate access to

the correct level of information by user class is just another challenge facing business dealing with the

technology and information explosion. This security issue is critical to HIPAA and must be considered in

protecting the rights of patients, while still permitting the analysis of information critical to the

advancement of all the related disciplines.

Health Data Management

Managed care organizations define key metrics from the data repositories to measure their organization‘s

progress. Examples of key metrics are per-member-per month (PMPM) pharmacy cost, average number

of prescriptions per thousand members (Rx/1000 members), and member cost share percentage. This

ability to use metrics to score card or present a management dashboard is an important trend in all

industries today. OLAP is a key technology putting these informational tools together.

OLAP systems are typically run on different computer hardware and software than OLTP systems, so the

performance of the operational systems (OLTP) is not affected by OLAP processing. The tuning of the

hardware and software systems can be set up specifically to support the unique needs and processing

requirements of OLAP. The analytical systems also can integrate data from variety of sources. For

example, it is possible to integrate patients‘ drug history information with their medical and lab claims

information to get a complete picture of their health state.

Forecasting based on the accurate information in these data repositories in an area receiving a lot of

attention. Using predictive modeling to provide an organization links to patients needing case

management, modeling historical benefit information, and predicting drug costs and rebates is a vital and

growing outgrowth of the OLAP systems. This predictive modeling is based on the use of algorithms and

supporting technology to focus on appropriate clinical programs to match the population. The processes

and programs can be used to identify high risk patients before they reach a crisis and assist with care

management. This predictive technology is also being applied to project the future cost of new benefit

designs by analyzing copay tiers, deductibles, benefit maximums, and health-care spending accounts to

derive new benefit plans to achieve specified objectives. Software tools exist that allow testing of a yet-to-

be-tried benefit plan against great volumes of historic data. The success of the plan can be tested before

it is introduced into the market place. Other software tools are designed to ―mine the data‖ or to look for

hidden relationships in the data instead of making assumptions about the data. These mining activities

can lead to innovative ideas and the discovery of clinical and financial relationships between drug

utilization, health state, future patient drug spend trends, and other important measurements. Of course,

the key to predictive analytics and data mining is having clean data in the source data repository and the

right tools and personnel to exploit the data.

9.8 Health Informatics

Information can be an important force in changing patient behavior, educating physicians, and modifying

online transaction-based systems. Using OLAP-powered informational systems in tandem with the claims

adjudication engines and transaction systems can empower an MCO to use the pharmaceutical channel

to become a quality supplier of healthcare services. The early adjudication systems have evolved from

offering simple eligibility verification and basic transaction editing to providing full-fledged pharmaceutical

care influencing patient and physician behavior. These systems will probably always manage drug costs

but also will evolve to encompass clinical guidelines developed from analyzing billions of transactions

from online analytical systems and offering information to the consumers to make more cost-effective

benefit decisions.

9.9 Advanced Pharmacy Systems

Pharmacy systems are now being interfaced with medical systems for single (or integrated) deductible

programs. They also are being designed to support and interface with increasingly available patient-

flexible spending accounts. They are even being interfaced with credit card systems in today‘s ever

increasingly cashless world. These interfaces and programs make it easier for the patient to assume an

equitable cost share and obtain needed medications quickly and easily. Continued evolution of these

systems will continue to require information technology resources and dedicated pharmacy professionals

to design and adapt technology to future challenges of these systems.

Recent drivers in the systems design have concentrated on meeting demands of new government

programs that favor consumer-driven healthcare benefits and the need to provide seamless integration

with other healthcare or finance systems. These drivers have been the largest factors impacting the

adjudication systems in recent years. Significant cost pressures due to increases in pharmacy costs have

forced information technology staffs to push more data out to the consumer. The new consumer-driven

health plans demand that patients have the information to make intelligent decisions regarding their own

healthcare dollars. Influences of government policies and programs will continue to have a major impact

on the function and expense of the pharmacy information systems. The last few years of government

regulations around PART D, HIPAA, and National Provider Indicator (NPI) have resulted in the regulation

fatigue for many healthcare information departments. The other driving force to watch is the innovative

cost-sharing plans between employers and benefit recipients.

The government regulations like HIPAA have forced information technology staffs to redesign their

pharmacy systems both in the pharmacy and on the payor side to accept new transaction sets. In the

addition to changing transaction sets, the privacy regulations have placed a daunting burden on the

system designers. Data must be secure and accesses constantly documented. However, locking down

the systems can only go so far before it interferes with business operations. Therefore, a balance must be

struck in the organization between operational efficiency and security, while still respecting all patients‘

rights. It is imperative that technology be coupled with new procedures and training on these new

regulations throughout all parts of healthcare administrative and provider organizations.

Benefits of Advanced Pharmacy Systems

Use of these advanced pharmacy informational systems will continue to grow, driven by cost

containment, consumerism, new government regulations, new business practices, competition, and

technology. Pharmacists will assist in designing innovative benefit plans, analyzing clinical issues from

the OLAP systems, and improving patient care prospectively by designing new edits placed in the online

transaction systems, and interfacing with the dispensing pharmacy systems. To continue to deliver

comprehensive pharmaceutical care, pharmacists will be required to analyze the captured transactions in

data warehouses, assist in the engineering of new pharmacy systems, and ultimately shape the future of

the pharmaceutical care channel with these advanced pharmacy informational systems.

10. NCPDP Standards in Prescription Process

NCPDP, located in Scottsdale, AZ, is a not-for-profit ANSI-accredited Standards Development

Organization consisting of over 1,500 members who represent chain and independent pharmacies,

consulting companies and pharmacists, database management organizations, federal and state

agencies, health insurers, health maintenance organizations, mail service pharmacy companies,

pharmaceutical manufacturers, pharmaceutical services administration organizations, prescription service

organizations, pharmacy benefit management companies, professional and trade associations,

telecommunication and systems vendors, wholesale drug distributors, and other parties interested in

electronic standardization within the pharmacy services sector of the health care industry.

NCPDP began as a small group of ad hoc committee members and has grown into a powerful presence

within the pharmacy industry's standards setting environment.

NCPDP develops and maintains standards for the pharmacy services sector of the health care industry. It

has the highest representation from the pharmacy services sector of healthcare. NCPDP has also been

named in federal legislation including HIPAA and MMA.

NCPDP standards brought in common transaction format. Some of the benefits of common transaction

format are:

Common syntax and dictionary

Adaptability

Reduced system development expense

Reduced equipment requirements

Reduced errors

Evolution of NCPDP Standards:

Prescription Process and the application of NCPDP

Before we discuss the NCPDP standards that are applicable to the pharmacy prescription process let us

first look at the pharmacy prescription process flow:

Figure - The Prescribing Process

The Prescription process is explained below:

The member first enrolls with the payer, who can be HMOs, Government programs, etc., for prescription

drug program/coverage. Once enrolled, members are issued prescription (Rx) ID cards. The member‘s

eligibility data is then sent to the PBM. When a member becomes sick he visits a physician and the

physician prescribes certain drugs for treating the patient‘s condition. The physician can prescribe

through a hand-written prescription or through electronic prescriptions (ePrescriptions).

ePrescription is the computer-to-computer transfer of prescription data between pharmacies, prescribers,

and payers. It is not the use of an email or a facsimile transaction. Electronic prescribing functions include

messages regarding new prescriptions, prescription changes, refill requests, prescription fill status

notification, prescription cancellation, and medication history.

The retail pharmacy receives the prescriptions from either the patient or directly from the physician‘s

office (ePrescription). A retail pharmacy POS system verifies the eligibility and coverage details of the

patient and drugs with the PBMs and appropriately receives the copay amount from the patient and

dispenses the drugs. The pharmacy claim is sent to PBM for adjudication. The PBMs contract with

Pharmaceutical manufactures for rebates. The manufacturers distribute drugs to pharmacies through

drug wholesalers and distributors.

The NCPDP Standards applicable to the above pharmacy prescription process are shown below:

Figure - NCPDP Standards Application In The Prescribing Process

SCRIPT Standard:

The SCRIPT standard was developed for transmitting prescription information electronically between

prescribers, providers, and other entities. The standard addresses the electronic transmission of new

prescriptions, changes of prescriptions, prescription refill requests, prescription fill status notifications,

cancellation notifications, relaying of medication history, and transactions for long-term care.

Manufacturer Rebate Utilization, Plan, Formulary, Market Basket, and Reconciliation Flat File

Standard

The NCPDP Manufacturer Rebate Utilization, Plan, Formulary, Market Basket, and Reconciliation Flat

File Standard provide a standardized format for the electronic submission of rebate information from

Pharmacy Management Organizations (PMOs) to Pharmaceutical Industry Contracting Organizations

(PICOs). It is used for data transmission between Processor / PBM and pharmaceutical manufacturer.

Formulary And Benefit Standard

This NCPDP Formulary And Benefit Standard provides a means for pharmacy benefit payers (including

health plans and Pharmacy Benefit Managers) to communicate formulary and benefit information to

prescribers via technology vendor systems. It enables the physician to consider the following kinds of

information during the prescribing process, so that he/she could make the most appropriate drug choice

for the patient.

Information about which drugs are considered to be ―on formulary,‖ and alternative medications

for those drugs not on formulary.

Limitations that may impact whether the patient‘s benefit will cover a drug being considered (such

as age limits, gender limits, step therapy rules, benefit-specific coverage exclusions, etc.)

The cost to the patient for one drug option versus another.

Billing Unit Standard:

Due to the number of processors, fiscal intermediaries, plan administrators, and Medicaid programs, the

billing unit standard was created to promote a ―common billing unit language‖ for the submission of

prescription claims.

Telecommunication Standard:

NCPDP recommends the use of a standardized format for electronic communication of claims and other

transactions between pharmacy providers, insurance carriers, third-party administrators, and other

responsible parties. This standard addresses the data format and content, the transmission protocol, and

other appropriate telecommunication requirements.

Usage of a common transaction format brings advantages to participants in the pharmacy industry. There

are significant advantages to both the Originator of the transaction and the Processor of the transaction

by adopting this version of the standard, such as:

• Common syntax and dictionary

• Adaptability

• Reduced system development expense

• Reduced equipment requirements

• Reduced errors

Universal Claim Form:

The Universal Claim Form provides a standard format for the paper submission of third party drug claims.

The Universal Claim Form does adhere to the data elements found in the Telecommunication Standard

and Data Dictionary.

Batch Transaction Standard:

The NCPDP Batch Transaction Format provides practical guidelines and ensures consistent

implementation throughout the industry of a file submission standard to be used between pharmacies and

processors, or pharmacies, switches, and processors. The batch file is to be submitted in a non-real-time

mode.

11. URAC Accreditation for PBMs

URAC is the national leader in promoting quality health care with over 20 different accreditation programs

across the continuum of care. Many are first-of-their-kind in the industry. The top US health plans hold

URAC accreditation, and URAC has accredited hundreds of organizations in all 50 states.

URAC's Pharmacy Benefit Management Accreditation demonstrates PBM‘s commitment to quality and

safety. It shows that PBM‘s contract terms and pricing structures are clear. And it shows that you ensure

access to drugs and pharmacies. It's a critical seal of approval for employers, consumers, regulators and

URAC offers the only third-party, voluntary accreditation program of this scope for pharmacy benefit

management and prescription services industry. All standards were developed by URAC‘s Pharmacy

Advisory Committee, which includes a wide range of stakeholders: employers, consumers, pharmacy

consultants, health plans, retail pharmacy, pharmacy benefit management organizations, pharmacy

professional organizations; labor, and large public purchasing groups.

PBMs and Health Plans demonstrate their commitment to quality. And organizations having undergone

URAC Accreditation consistently report the value it has brought in improving operations and enhancing

regulatory compliance activities.

URAC provides the following standards related to the PBM Industry:

Pharmacy Benefits Management

Drug Therapy Management

Specialty Pharmacy Accreditation

o The URAC accreditation program design for Specialty Pharmacy is as follows:

Module 1: Core Organizational Quality Standards

Module 2: Customer Service, Communications, and Disclosure Standards

Module 3: Specialty Drug Management Standards

Module 4: Pharmacy Operations Standards

Module 5: Patient Management

Mail Pharmacy Accreditation

o The URAC accreditation program design for Mail Service Pharmacy is as follows:

Module 1: Core Organizational Quality Standards

Module 2: Customer Service, Communications, and Disclosure Standards

Module 3: Mail Drug Management Standards

Module 4: Pharmacy Operations Standards

Workers‘ Compensation Pharmacy Accreditation

12. TRICARE Pharmacy (Tpharm)

TRICARE provides pharmacy benefit to all eligible Uniformed Services members, including TRICARE for

Life (TFL) beneficiaries entitled to Medicare Part A and B based on their age, disability and/or end-stage

renal disease. Eligible beneficiaries may fill prescription medications at military treatment facility (MTF)

pharmacies; through the TRICARE Mail Order Pharmacy (TMOP); at TRICARE retail network pharmacies

(TRRx); and at non-network pharmacies. To have a prescription filled beneficiaries need a written

prescription and a valid Uniformed Services identification card. To update information and obtain a valid

identification card, beneficiaries should contact the: Defense Enrollment Eligibility Reporting System

(DEERS).

TFL beneficiaries who turned age 65 on April 1, 2001, or later, must be enrolled in Medicare Part B to use

the pharmacy program.

TFL beneficiaries who turned age 65 before April 1, 2001, are not required to be enrolled in Medicare Part

B for the pharmacy program, but are required to be enrolled in Medicare Part B for all other benefits

available under TRICARE for Life.

TRICARE's mandatory generic drug policy, which has been in place for more than 10 years, requires that

prescriptions be filled with a generic product, if one is available. As with most prescription drug plans,

beneficiaries enjoy a significant cost savings by asking their doctors to prescribe the generic equivalent of

a brand-name drug. In the United States, all generic drugs must undergo Food and Drug Administration

(FDA) testing and approval and are considered safe alternatives to brand-name drugs

Pharmacy Copayment and Cost-Share Structure

The current pharmacy cost-share structure-meaning the percentage or fixed amount that the beneficiary

pays toward the cost of the medication-is based on whether a prescription medication is a generic,

formulary or non-formulary pharmaceutical. The copayment is the same for all TRICARE beneficiaries

(except active duty service members, who receive medications free-of-charge) depending on where the

beneficiary chooses to fill their prescription.

Active duty service members do not pay cost shares for prescriptions. However, if they are overseas and

receive medications through an out-of-network pharmacy, they may need to pay out-of-pocket for the total

cost of the medication and then file a claim for reimbursement for the full amount.

Beneficiaries may have prescriptions filled in one of four places: at the MTF, through the TMOP, or at one

of the more than 54,000 TRRx in the nationwide network. Beneficiaries may also have prescriptions filled

at non-network pharmacies, but will pay significantly more and must meet a deductible.

This copayment structure applies to all beneficiaries, regardless of their TRICARE Prime enrollment

status. A comparison of the point-of-service copayments and the associated quantity of medication

dispensed is noted in the chart below.

TRICARE Pharmacy Copayments In the U.S.

(Including Puerto Rico, Guam, Virgin Islands)

Place of Service Generic Formulary

(brand name) Non-formulary*

Military

Treatment

Facility (MTF)

Pharmacy

$0 $0 Not Applicable**

TRICARE Mail

Order Pharmacy

(TMOP)

(up to a 90-day

supply)

$3 $9 $22***

Retail network

pharmacy

(up to a 30-day

supply)

$3 $9 $22***

Non-network

Retail Pharmacy

(up to a 30-day

supply)

For those who are Not enrolled in

TRICARE Prime:

$9 or 20 percent of total cost, whichever is

greater, after deductible is met (E1-E4:

$50/ person; $100/family; All others,

including retirees, $150/person,

$300/family)

For those who are Not enrolled in

TRICARE Prime:

$22 or 20 percent of total cost, whichever

is greater, after deductible is met (E1-E4:

$50/ person; $100/family; All others,

including retirees, $150/person,

$300/family)

TRICARE Prime:

50 percent cost-share after point-of-service

(POS) deductibles ($300 per person/$600

TRICARE Prime:

50 percent cost-share after point-of-

service (POS) deductibles ($300 per

per family deductible) person/$600 per family deductible; 50

percent cost-share)

Note: Beneficiaries using non-network pharmacies may have to pay the total amount of

their prescription first and file a claim (DD Form 2642) to receive partial reimbursement.

Beneficiary Cost Share at all other overseas locations

(May Vary by Location - See Note 1)

Active Duty

Servicemembers

Active Duty family members ****

Retirees and

family members Global Remote

Overseas Prime Overseas Standard Overseas

No copay 0% 50% 25% 25%

**MTFs are prohibited by law under the Code of Federal Regulations from carrying non-formulary

medications.

***If medical necessity is established for a non-formulary drug, patients may qualify for the $9 cost share

for up to a 30-day supply in the TRRx or a 90-day supply in the TMOP program.

****After applicable deductibles have been met.

Please Note: This Information was obtained from the following link as on May 2009

http://www.military.com/benefits/tricare/tricare-pharmacy/tricare-pharmacy-program#1

MTF Pharmacy

Prescriptions may be filled (up to a 90-day supply for most medications) at an MTF pharmacy at no cost

to the beneficiary, if the medication is on the MTF formulary. Beneficiaries should contact their local MTF

to find out what is on the formulary and for specific details about filling and refilling prescriptions at the

MTF pharmacy. They can use the TRICARE Formulary Search Tool to find out what medications must be

made available at all full service military pharmacies (called the Basic Core Formulary), and they may visit

the MTF locator to find the closest MTF. With no copayment, the MTF pharmacy is the best value to the

beneficiary.

TRICARE Mail Order Pharmacy (TMOP)

TMOP is administered by Express Scripts Inc. (ESI) and is available for prescriptions that beneficiaries

take on a regular basis. For the beneficiary, it is the more cost-effective way to receive prescriptions

compared with using retail pharmacies. Beneficiaries may receive up to a 90-day supply for most

medications. Prescription refills may be requested by mail, phone or online. Beneficiaries who have

prescription drug coverage from another health insurance plan may not use TMOP unless the medication

is not covered under the other plan, or unless the beneficiary exceeds the dollar limit of coverage under

the other plan.

To use TMOP, beneficiaries simply register with TMOP by completing the registration form available

online at www.express-scripts.com/TRICARE. They should follow the instructions on the ESI Website to

submit the form. Beneficiaries should then mail their health care provider's written prescription and the

appropriate cost share to ESI. New prescriptions may also be faxed or phoned in by the provider. Within

10-14 days, the medications are sent directly to the beneficiary. Beneficiaries may also contact the

TRICARE Service Center for assistance.

TRICARE Retail Pharmacy Program (TRRx)

Beneficiaries in the United States and its territories (Guam, Puerto Rico, U.S. Virgin Islands) may use an

expanded, nationwide network of more than 54,000 retail pharmacies to fill prescriptions. By using a

pharmacy in the ESI network, beneficiaries no

Medical Necessity

TRICARE understands that patient-treatment decisions are between the patient and the doctor. Within a

therapeutic class, if the physician feels that it is medically necessary for the patient to receive the non-

formulary medication instead of the formulary medication, then the physician should call the Tpharm

Contractor, prior to the patient obtaining the initial prescription or refill, in order to first obtain medical

necessity approval by Tpharm Contractor.

In order for medical necessity to be established, one or more of the following must occur:

Use of all formulary medications is contraindicated, and the use of the non-formulary medication

is not contraindicated.

The patient must experience, or would be likely to experience, significant adverse effects from the

formulary medication, and the patient is reasonably expected to tolerate the non-formulary

medication.

The formulary medication has resulted in, or is likely to result in, therapeutic failure, and the

patient is reasonably expected to respond to the non-formulary medication.

The patient has previously responded to the non-formulary medication, and changing to a

formulary medication would incur an unacceptable clinical risk.

There is no alternative pharmaceutical agent on the formulary.

References:

Books:

1. Managed care Pharmacy Practice‖, by Robert P. Navarro

2. The ABC of PBMs, by National Health Policy Forum

3. Managed Care Pharmacy Practice book – Author – Robert P. Navarro

4. Managed Healthcare an Introduction – 3rd Edition of Academy for Healthcare Management

5. The managed health care handbook By Peter Reid Kongstvedt - Pages 424, 425

6. Handbook of Pharmaceutical Public Policy By Thomas R. Fulda, Albert I. Wertheimer Pages 259,

262, 273

7. HCFA Study of the Pharmaceutical Benefit Management Industry ©2001,

PricewaterhouseCoopers LLP - http://www.cms.hhs.gov/reports/downloads/cms_2001_4.pdf

Online Journals/Articles:

1. http://www.amcp.org/data/jmcp/update_v5_565-573.pdf

2. http://www.ftc.gov/be/healthcare/docs/V920017%20CA%20Pharmacy%20Services.PDF

3. http://www.ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf - PBM Ownership of Mail-

Order Pharmacies – Federal trade commission report August 2005

4. http://findarticles.com/p/articles/mi_m0NKV/is_1_4/ai_97592327/pg_1?tag=artBody;col1

5. http://www.imakenews.com/seroper/e_article000671706.cfm?x=b11,0,w

6. http://www.ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf - Pharmacy Benefits

Managers: Ownership of Mail-Order Pharmacies, Federal Trade Commission report August 2005

7. Annual Report 2007- Express Scripts Inc.

8. Annual Report 2007- Medco Inc

9. http://www.law.uh.edu/healthlaw/perspectives/2006%5C(JV)PartDFinal.pdf

10. http://content.healthaffairs.org/cgi/content/full/hlthaff.w4.504/DC1 - The Role Of PBMs In

implementing The Medicare Prescription Drug Benefit-By Robert F. Atlas.

11. http://findarticles.com/p/articles/mi_m0NKV/is_12_3/ai_95399767

12. http://www.moneymanagement.com.au/Articles/Advice-pricing-switching-to-

feeforservice_0c03d283.html

13. http://www.thehealthcareblog.com/the_health_care_blog/2006/02/pbms_more_on_th.html

Websites:

1. http://www.badfaithinsurance.org/reference/LMCOPBM/0010a.htm

2. http://www.express-scripts.com/industryresearch/industryreports/specialtytrendreport/2004/

3. http://www.medicinenet.com/script/main/art.asp?articlekey=46204

4. http://www.managedcaremag.com/archives/0209/0209.pbms.html

5. http://www.cms.hhs.gov/MMAUpdate/

6. http://www.rxhub.net/index.php?option=com_content&task=view&id=28&Itemid=39 – Website of

RxHub, LLC

7. http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=200903040051

95&newsLang=en

8. www.x12.org

9. www.NCPDP.org

10. http://www.ncpdp.org/pdf/Eprescribing_fact_sheet.pdf

11. http://www.ncpdp.org/PDF/Basic_guide_to_standards.pdf

http://www.military.com/benefits/tricare/tricare-pharmacy/tricare-pharmacy-program#1